Barkley writes: >Then in 1968 LBJ attempted to fight inflationary pressures by instituting a one-year income tax surcharge. It failed ... Of course, ironically, Lucas actually explained why the LBJ tax increase did not stifle inflation. Policymakers relying on a structural econometric model for policy forecasting cannot do so if their actions change people's expectations and thus (in effect) change the values of the coefficients in the models. The announcement that the tax increase was only temporary had such an expectational effect, and one useful outcome of the whole ratex exercise was indeed to make economists think more seriously about how expectations operate and influence things, even if the ratex folks themselves were hopelessly off.< The macro textbooks don't use ratex to explain the failure of LBJ's tax hike. They do use expectations, as part of the MF's "permanent income hypothesis" (one of the most over-rated "theories" around, BTW). But ratex assumes that people know the results of a _model_ of the economy (on average). The permanent income hypothesis simply says that people base their expectations on the past and the news (such as that the tax hike was a one-shot deal). Th MF's theory might be seen as one of the intellectual precursors of ratex, but he is too much of a realist to embrace ratex. I think a more interesting question is why LBJ instituted such a wimpy anti-inflationary effort despite his advisors' warnings that it wouldn't work. Given the Vietnam war's developments in 1968, LBJ simply faced too much popular opposition to feel he could get away with a real anti-inflation policy. His first proposal didn't make it through Congress, so he had to compromise. Jim Devine [EMAIL PROTECTED] & http://clawww.lmu.edu/Faculty/JDevine/jdevine.html Bombing DESTROYS human rights. US/NATO out of Serbia!
