Do Conservative Governments Make a Difference in Monetary Policy? A Study of the U.S. and the U.K
Ott, Attiat F., Belova, Anna, Dolgopolov, Vladislav, Atlantic Economic Journal
"Perhaps the ultimate test of the conservative status of government is its willingness to pursue stable monetary policy."
William E. Simon, 1980, p. 8
Introduction: The Simon's Agenda
In his speech before the Mont Pelerin Society (1980), the late William E. Simon articulated his vision for the future of the nation in a program he called "An Action Program to Achieve National Goals." The program advocated the use of macroeconomic (monetary and fiscal) as well as microeconomic policy to achieve the long-term goals of society enumerated as price stability, employment opportunity, real economic growth, strong trade and a sound U.S. dollar. To put his case before his audience, Simon began by reviewing the state of the nation, "A chronic double-digit inflation, rising unemployment, rapidly deteriorating output approaching disastrous levels in key sectors of the economy, continued mass trade deficits, and a dollar propped up by historically high interest rates" [Simon p. 1].
Contrasting current economic indicators with their levels two decades earlier, Simon reported that in 1979 the inflation rate stood at 13.3 percent compared to 5.4 percent over the period 1966-76, and 1.8 percent in the years 1956-66. The growth rate of real GDP, which stood at 3.9 percent over the period 1955-66, and 2.7 percent in 1966-76, amounted to only 1 percent in the year 1979. As to the unemployment rate, it registered 9.5 percent in 1979 compared to 5.5 percent and 5.3 percent in the earlier periods. Productivity growth, which amounted to 2.8 percent in the past decades, turned negative in the order of-1.8 percent in 1979. As to the growth rate of money (M1), monetary policy was clearly expansionary with a growth rate of 5.7 percent compared to a rate of growth of 2.5 percent in the 1956-66 decade.
Along with his diagnosis of the economic ills that has befallen the nation, Simon high-lighted inherent weaknesses in public affairs, which, in his view, hindered policy maker's abilities to address the nation's economic problem. According to Simon [p. 1-2]:
"while economic issues are of crucial significance, the actual public policies will not be determined by considerations of fiscal spending, taxation, growth of money and credit, regulatory and administrative actions affecting productivity or the economic aspects of energy policies. Nor will the policies adopted focus on the long term goals of society which has traditionally expected stable prices, employment opportunities, real economic growth leading to rising personal standards of living and strong dollar position in the world economy."
Of the many economic ills that he has enumerated as facing the nation in the 1980s, Simon singled out inflation as the most destructive element. As he put it, "When inflation distorts the economic system and destroys the incentives for real improvement the people will no longer support that system and society disintegrates." Simon rejected the Phillips curve's notion of a trade-off between unemployment and inflation, which was accepted at the time. To Simon, the achievement of both goals is interdependent. He strongly believed that both objectives go hand in hand, "If we are to increase the output of goods and services and reduced unemployment, we must make further progression in reducing inflation" [Simon p. 5].
Having made his case, Simon devoted the remainder of his speech outlining an agenda for the nation's future. An agenda designed "to restore the American model of domestic economic growth and international leadership" [Simon p. 12]. Recognizing the complexity of the task, Simon was convinced that no one instrument can accomplish the task. The program he put forth was quite comprehensive, one that required the coordination of national economic policies. Simon's "Action Program" consisted of five recommendations referred to as "rules." Rules 1, 2, and 3 are fiscal rules for addressing budget posture, the level of federal spending in relation to GDP, and the tax burden. …