We're All Keynesians Now

We're All Keynesians Now

The WaPo has an article about the sliding dollar.
Here's the basics:

The dollar continued its decline in global currency markets yesterday, intensifying worries among some economists that mounting U.S. budget and trade deficits could send the U.S. currency into a tailspin.

But John B. Taylor, the Treasury undersecretary for international affairs, defended the Bush administration view that the deficits pose no danger of a dollar collapse. He issued a detailed rebuttal of what he called "scare stories."


But, I was struck by this paragraph in the article:

Taylor said administration policies already in place will help shrink the trade deficit. One is President Bush's pledge to cut the budget deficit in half, as a percentage of the U.S. gross domestic product, by 2009. That would decrease the trade deficit because lower government spending or higher taxes would reduce the amount of money consumers spend on imported goods.

This is a fascinating passage. He's arguing deficit reduction plans will reduce aggregate demand, and therefore spending on imports, and that's a good thing. In other words, the president's policies are great because they'll reduce the trade deficit by making us all poorer?

This is a basic simple short run Keynesian argument - increase taxes/reduce spending and demand/output fall. But, it isn't the kind of argument Bush administration officials usually make (unless they're justifying tax cuts to increase employment after their other justifications disappear). It isn't the kind of argument sensible people really make over a 5 year time horizon.
It isn't an argument that actually makes sense unless the guy is promising recession.

weird.

Though, this passage at the end is really the kicker:
President Bush's news conference yesterday did little to lessen concerns over the deficits, Wall Street analysts and currency traders said. Bush simultaneously promised not to raise taxes under the guise of tax simplification, to pursue a costly restructuring of Social Security and to cut the budget deficit in half by 2009.

The currency markets aren't buying it, said William G. Gale, an economist at the Brookings Institution.
And nor should we.


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