"Overly Tight Money" in the Bush Era… The World According to Kudlow

I haven’t gotten a response from Katherine Jean Lopez about why the NRO doesn’t mind printing erroneous economic information. I doubt I will. And if you haven’t checked out the results of my asking the question at a right-wing blog whose readers were indignant about the NRO getting details wrong about some Hezbullah doings in Lebanon – a rather trivial issue for most of us, I imagine – its worth a look. But meanwhile, here’s a Kudlow piece in at the NRO explaining why there might be a slowdown in the economy:

Yes, economic growth may indeed pause to roughly 2 percent in the next couple of quarters, the result of two years of overly tight money from the Federal Reserve and the ensuing upturn in sub-prime defaults and foreclosures.

Overly tight money from the Fed… Let’s look at that for a moment. We can get the annual Federal funds effective rate, subtract off annual inflation rate (i.e., the percentage change in the CPI – U) between that year and the next, and we get the real annual Federal funds effective rate. (In other words…. the real annual Federal funds effective rate for 1980 is equal to the nominal annual Federal funds effective rate less the inflation between 1980 and 1981.) Since the CPI – U is not yet available for December of 2007, we can estimate the 2007 inflation using the percentage change between the average CPI – U for the first 11 months of 2006 and the first 11 months of 2007.

The Fed data is available going back to 1955… here’s a graph of what it looks like:

Now, looking at that graph, you might already be thinking… the money supply in 2006 didn’t look all that tight, at least relative to non-recession and non-stagflation periods in the past 30 years. But we can be more precise… here’s a table showing the real annual Federal funds effective rate for each year of the GW administration so far.

Obviously, we don’t know what the real annual Federal funds effective rate will be for 2007 – though perhaps Kudlow does. But its easy to show that over 41% of all years between 1955 and 2000 have had tighter real money than 2006 – that may not be loose money, but it isn’t tight by any historical standards. And besides, money is supposed to be “loose” or “tight” according to current economic conditions. Aren’t guys like Kudlow always telling us that in the last few years, the economic has been booming?

As an aside, we also know the rate was higher in five of eight years during the Clinton administration… would Kudlow would say the Fed was choking off growth then?

FWIW, I would characterize Kudlow’s statement as misleading. Which presumably makes it a fine statement to Katherine Jean Lopez. I was planning to look at the second half of Kudlow’s excuse – about how the the “upturn in sub-prime defaults and foreclosures” happens to be “ensuing” from this overly tight money – but I have things to do.