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Politics

Deja Vu

1 February 2003

Deja Vu All Over Again

By Gwynne Dyer

Has anybody else noticed that there is a plot afoot to turn economics into an exact science? Since we are all part of the experiment, I think we should be told.

Economics is about the behaviour of human beings, so it has the same drawback as other social ‘sciences’: you are not allowed to confirm your hypothesis by running repeated experiments on live human beings. Somehow, though, an undercover team of experimental economists has managed to trick the Bush administration into re-running the great Reagan adventure in ‘voodoo economics’ of the 1980s. They can’t tell us which theory they are testing for fear of influencing the results, but it looks like it’s about the relationship between the size of budget deficits and the severity of the subsequent recession.

Ronald Reagan set a peacetime record for budget deficits in 1984, the year that he was seeking a second term: 6.2 percent of Gross Domestic Product. He justified it by grossly inflating the threat from the decrepit Soviet Union, which was actually teetering on the brink of collapse (the intelligence agencies were as eager to please the administration then as now), and pumping up the defence budget to fight the ‘evil empire’. The short-term result of this extra spending, no doubt by purest coincidence, was to make the US economy grow by 7 percent in 1984, guaranteeing Mr Reagan’s sweeping re-election victory.

The longer-term effect, of course, was force up interest rates as government borrowing competed with private borrowers for credit, and to kill the boom in a particularly savage way: the recession at the end of the 80s was the grimmest since the 50s. Small wonder that the father of the current president, a real conservative (as opposed to a neo-conservative), dubbed the Reagan budgets ‘voodoo economics’ when he was seeking the Republican nomination in 1988. It didn’t save President George H.W. Bush from the recession that followed, however, and the voters punished him by electing Bill Clinton in 1992.

So along comes President George W. Bush in 2001, and in only three years he has turned the 2 percent surplus he inherited from Clinton into a deficit that is now nearing 5 percent of GDP. Since the defence budget is already stuffed to bursting, he did most of it by pushing through unfunded tax cuts targeted on his core supporters.

At one point, according to the recent tell-all book written by Ron Suskind in collaboration with former Treasury Secretary Paul O’Neill, Mr Bush appears to have had doubts about the beneficiaries if not the scale of his largesse, asking “Haven’t we already given money to rich people? Shouldn’t we be giving money to the middle?” But his political adviser Karl Rove told him to “Stick to principle” and he meekly obeyed.

The massive deficit — $520 billion this year, and the final bill for Iraq could drive it still higher — is already producing the desired short-term economic boom. If it starts to create jobs as well as profits by the middle of the year, then only a drastic deterioration in the security situation in Iraq could stop Mr Bush from winning in November. But that’s not what interests the economists-in-disguise who tricked him into this repeat of the Reagan experiment. They just want to see how bad the subsequent recession will be.

Recessions are bound to occur from time to time, but they vary wildly in severity. Many people expected a particularly bad one after the exceptionally long nine-year Clinton boom, mainly due to a superstitious belief that the universe will always get even, but in fact the recession we have just come through was one of the mildest on record. So you can see the cutting-edge economic theorists getting together and coming up with a brilliant new theory: budget surpluses are followed by gentle recessions; huge deficits lead to brutal recessions.

But if you want your discipline to be recognised as a proper science, then you have to reproduce the results under properly controlled experimental conditions. How could we ever get another administration to repeat Reagan’s folly? It’s not just Americans who would suffer, either: the whole world would face a long, bitter recession in a few years if America went down that road again. Have we the right to do that to people in the name of science?

Of course we do; science is important, and besides we’ll probably get the Nobel Prize in economics. So the whole massive operation went ahead: the kidnapping of Vice-President Dick Cheney at his secret ‘secure location’ and the substitution of a surgically altered look-alike experimental economist who goes around spouting lines like “Reagan proved that deficits don’t matter.” It is certainly a daring experiment, though one has reservations about how responsible it is.

It’s hard to create conditions that exactly duplicate those of the Reagan era. This time, for example, there is no opposition-controlled Congress trying to cut the deficits and mandate a balanced budget, so the swings may be more extreme than first time round. But if you want to test a theory to destruction, this should work just fine.

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To shorten to 750 words, omit paragraph 6. (“At one point…obeyed”)