An Economic History

William A. Niskanen, chairman of the Cato Institute...

// omg, when you hover the mouse over his picture, he glows!!

...Niskanen writes:

The origins of the long boom date from a time of troubles in the U.S. economy and government in the late 1970s. At that time, both unemployment and inflation were increasing--a combination of conditions that economists did not understand, so they called it "stagflation."

That little bit of Niskanen's article is just right.

The 1970s was a "time of troubles" -- that's Arnold Toynbee's phrase, by the way -- when stagflation arose. And since the Keynesians couldn't explain the stagflation, Keynesian economics fell into disrepute and economics fell into disarray. Out of that dark time arose Reaganomics, which carried us thirty years and gave us the financial crisis of 2008. (Don't get antsy. The Keynesians would have got us there eventually. They're no different in any way that matters.)

But this little bit of Niskanen is just wrong:

[A] substantial part of the credit for the long boom is due to the long period of unusually effective monetary policy, beginning with the appointment of Paul Volcker as chairman of the Federal Reserve in 1979. Volcker implemented a policy of lower money growth... Alan Greenspan has maintained this policy since his appointment in 1987... [T]his led to an unusually steady growth of total demand during the Clinton years through 1998 and a further 2 percentage point reduction in the inflation rate. A sustained policy of tight money has proved both necessary to reduce inflation and, in the long run, consistent with low unemployment.

No. Tight money may have reduced inflation, but unemployment didn't go "low." And tight money didn't lead to "steady growth of total demand." Tight money did not create the boom. If anything, loose credit created the boom. "Credit" for the long boom must go to credit-use.

The economy is transaction. If it happens in the economy, it happens via spending. Spending requires a "medium of exchange." Money is our medium of exchange, money and credit. Money was tight, but credit-use was encouraged, so we used credit. That's why private-sector debt got so god-awful big, of course.

And that god-awful debt is proof that loose credit, not tight money, created the boom.