Budget Deficits and Interest Rates

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Extracts from text books written prior to their appointments by the two Chairmen of the Council of Economic Advisors who served President Bush during 2001-2004.

R. Glenn Hubbard, CEA 2001-2003

The record budget deficits of the Reagan/Bush years created “pressures” on interest rates.

“By the late 1990s, an emerging federal budget surplus put downward pressure on interest rates.”

Money, the Financial System, and the Economy (2002)

New York: Addison-Wesley Publishing Co.

R. Glenn Hubbard

N. Gregory Mankiw, CEA 2003 –

Thinking Like an Economist:

Why Economists Disagree: Charlatans and Cranks:

An example of fad economics occurred in 1980, when a small group of economists advised presidential candidate Ronald Reagan that an across-the-board cut in income tax rates would raise tax revenue. They argued that if people could keep a higher fraction of their income, people would work harder to earn more income. Even though tax rates would be lower, income would rise by so much, they claimed, that tax revenue would rise.

Almost all professional economists, including most of those who supported Reagan's proposal to cut taxes, viewed this outcome as too optimistic. Lower tax rates might encourage people to work harder, and this extra effort would offset the direct effects of lower tax rates to some extent. But there was no credible evidence that work effort would rise by enough to cause tax revenues to rise in the face of lower tax rates.

George Bush, also a presidential candidate in 1980, agreed with most of the professional economists: He called this idea “voodoo economics.” Nonetheless, the argument was appealing to Reagan, and it shaped the 1980 presidential campaign and the economic policies of the 1980s....

People on fad diets put their health at risk but rarely achieve the permanent weight loss they desire. Similarly, when politicians rely on the advice of charlatans and cranks, they rarely get the desirable results they anticipate. After Reagan's election, Congress passed the cut in tax rates that Reagan advocated, but the tax cut did not cause tax revenues to rise. ... tax revenue fell... government began a long period of deficit spending... largest peacetime increase in the government debt in U.S. history.

Fads can make experts seem less united than they actually are... when the economics profession appears in disarray, you should ask whether the disagreement is real or manufactured... [by] some snake-oil salesman who is trying to sell a miracle cure...

Principles of Economics (1998)

New York: Dryden, pp. 29-30

N. Gregory Mankiw