William Vickrey and Those Forecasts of a Clinton Recession
AB reader Homer Simpson recently suggested we check out We Need a Bigger Budget Deficit by William Vickrey (1914-1996). Vickrey’s writings included Agenda for Progressive Taxation (his dissertation) and Public Economics (Cambridge University Press, 1994). Vickrey and James Mirlees were awarded the Nobel Prize in Economic Sciences in 1996 for their contributions to the theory of incentives under asymmetric information.
Vickrey’s discussion was published on August 6, 1993 just days before President Clinton signed the Revenue Reconciliation Act of 1993. The discussion opens:
We are not going to get out of the economic doldrums as long as we continue to be obsessed with the unreasoned ideological goal of reducing the so-called deficit.
One can read this discussion as criticizing the macroeconomic approach recommended by Clinton’s economists in 1993, but for very different reasons that the criticisms of the free lunch supply-side crowd that we criticized earlier this week. As I read Vickrey, he was a left-leaning Keynesian in the spirit of Max Sawicky or James Galbraith.
Let’s recall the macroeconomic environment during the summer of 1993. We had continuing large budget deficits even after the moves towards fiscal responsibility from the first President Bush. And while we were slowly recovering from the recession during Bush41’s term of office, the labor market was still weak with unemployment falling just under 7% for the first time since the fall of 1991. The Clinton economic team wrestled with how to restore fiscal restraint and long-term economic growth but also to restore full employment and seized upon a strategy of expansionary monetary policy plus fiscal restraint to be phased in only gradually.
While the Republicans refused to support any tax increases, their reasoning was a far cry from that of left-leaning Keynesian as they would have opted for deeper and faster reduction in government spending. It is true that the Republicans forecasted that the 1993 tax increase would lead to slow economic growth and a recession, but history shows us that their forecast did not turn out so well either.
Flash forward to the policy debates of 2005 where we once again have a weak labor market and a large budget deficit. One would think we’d be combining monetary expansion with phased-in fiscal restraint, but instead we have the Republicans still calling for more tax cuts (not increases as I first mistakenly wrote) as their loyal talking heads are happy that the Federal Reserve is increasing the Federal funds rates.