en this effect in 1981 when the administration first embarked on its expansive course
as our trade deficit shot past the 100 billion dollar mark, economists and politicians
alike began to search for a solution. Most economists agreed that the trade deficit
was caused by the overly strong American dollar, which was in turn caused by the
runaway budget deficit. But many politicians began to argue for trade barriers to
keep out the flood of imports. The Reagan administration resisted this approach.
Five months after the Bonn summit, the U.S., Japan,
France, Britain and Germany announced a coordinated effort to reduce the value of
the U.S. dollar. The move was a promising effort to ease the U.S. international trade dilemma and possibly create more jobs for American workers. But major problems remained. By 1985, the United States was running 200 billion dollar budget deficits. But half the economic stimulus, the amount of the U.S. trade deficit, was going overseas and any effort to contain this deficit or to promote continued growth had a major impact around the world
Comment and Analysis by Richard Gill
The main reason the international aspect is so important today is that the numbers are so big. In 1971 the deficit was a little over $2 billion. By 1984, it was over $105 billion. And what these numbers mean is that we cant separate our domestic
stabilization policies from our international trade policies.
The Employment Act of 1946 created a Council of Economic Advisors to give the president the benefit of the best economic advice. For almost 40 years the essence of this advice was to manipulate the economy to prevent inflation and to promote growth. It was called counter-cyclical policy. But, by 1985, the man who occupied this office was urging a receptive president to keep his hands off. By 1985, the man who held this office sharply rejected the idea that the government could fine tune the economy. Monthly fine-tuning of monetary policy created havoc in the economy,
When Paul Volcker initiated a new monetary policy designed to quell inflation once and for all, he made much of the fact that the new policy was on for the duration. No more starts and stops. When Ronald Reagan embarked on the most expansive fiscal policy in history, he locked his policy in place three years in advance. No turning back. 1983 and 1984 were years of growth in the American economy, but, as the economy grew, the budget deficit grew even faster. By 1985, many economists felt that fiscal policy was dead
a casualty of the towering deficit.
In 1985, the sour notes in our economic performance
warned that problems of inflation and unemployment were still with us. But the
consensus of the economic community was that the most effective response was a
policy of coarse-turning rather than the more active management of an earlier
Comment and Analysis by Richard Gill
Back in the 1950s and 1960s, the Keynesian view was dominant. With slight turns of the rudder of monetary and especially fiscal policy, one could, most economists felt, steer the economic ship past inflation and of unemployment. But today even Neo-Keynesians concede that economic navigation may be less of an exact science than was once imagined. In general, the shift of emphasis from fine-tuning to coarse-tuning has been a shift in time perspective from the short to the longer run. Active intervention in the short run, many economists now feel, may only intensify our longer-run problems.
Unfortunately, there is no real agreement as to what the truly important long-run factors are.