An Exclusive Interview with John Mueller, part 3

It is a delight to interview John D. Mueller, one of the most important aides to Rep. Jack Kemp and an intimate participant in the formulation and implementation of what became known as "Supply Side Economics," whose implementation was a critical factor in propelling the world GDP from $11T to >$61T (not adjusted for inflation yet nonetheless a dramatic age of prosperity).

Photo of John Mueller courtesy of EPPC

Mueller is described at the Ethics and Public Policy Center as:

the Lehrman Institute Fellow in Economics and Director of the Economics and Ethics Program at the Ethics and Public Policy Center. Mr. Mueller specializes in the relation of modern economic theory to its Judeo-Christian and Greco-Roman origins, its practical application to personal, family, and political economy, and the interaction of economics, philosophical worldviews, and religious faith.

Mr. Mueller is also president of LBMC LLC, a firm in Washington, D.C. specializing in economic and financial-market forecasting and economic policy analysis. He has more than 30 years’ experience in those fields. Besides investment managers, Mr. Mueller has advised many American and foreign economic policymakers on monetary policy and exchange rates, policies for reducing unemployment, and income-tax, welfare and Social Security reform. He is author of Redeeming Economics: Rediscovering the Missing Element (ISI Books, 2010). From 1979 through 1988, Mr. Mueller was economist and speechwriter to then-Congressman Jack Kemp, mostly as Economic Counsel to the House Republican Conference (caucus) of which Kemp was chairman. In that capacity he drafted bills originating some key features of President Ronald Reagan’s tax cuts of 1981 and Tax Reform Act of 1986 and of Kemp’s 1988 presidential campaign. Mr. Mueller graduated in 1974 from Haverford College.

Herewith the third part of this interview:

Q:  You were Jack Kemp's chief economist.  There was a long process by which Rep. Kemp was persuaded to take up the gold standard.  May we have any of your recollections of that process?


A: I should start by noting that Jack had many able economists before me, including Paul Craig Roberts, Bruce Bartlett and Spencer Reibman, as well as a stellar wider circle of key economic advisers, including Robert Mundell, Art Laffer, Lewis Lehrman, Norman Ture, Steve Entin, Richard Billmire, Jan Olsen, Joe Rogers, Richard Rahn, Cesar Conda, and Gary and Aldona Robbins. Jack always favored "a dollar as good as gold." The key problem was sifting through all the disagreements among his advisers and deciding on the best solution.


Q:  There was a long argument between Jude Wanniski, who favored Fed-targeting of the gold price, and Lewis E. Lehrman, who favored, as he still does, the classical gold standard.  Rep. Kemp eventually was persuaded of the Lehrman view.  What was the process, and what arguments finally won him over?


A: I tried to describe the process in detail at a Jack Kemp Foundation event last summer commemorating the Gold Standard Act of 1984, described here.  Jude was brilliantly intuitive. But Lew had learned directly from Jacques Rueff and acted on this knowledge in decades of investing in the markets. Jack often stated during his 1988 presidential run that Lew would be his Treasury Secretary if he were elected president.


Q:  You are on record, extensively, describing the flaws in the Wanniski model.  Would you provide a short summary here?


A: Well, we had extensive discussions of the monetary issue during the time I worked for Jack. But several former staffers and advisers also started their own consulting firms: Dave Smick and Manuel Johnson in what is now Johnson Smick, and Jude Wanniski founded Polyconomics, Inc. But in 1988 Jeff Bell, Frank Cannon and I, joined in 1990 by Lew Lehrman, formed Lehrman Bell Mueller Cannon, Inc., of which LBMC LLC is the successor. We were motivated not only by the desire to earn a living but also to settle the policy disagreements which could not be settled on the basis of differing theories alone. What we did at LBMC was to update and test Jacques Rueff's theories with empirical evidence. LBMC's first big call was to predict,  based on the earlier 1986-1988 expansion of the World Dollar Base, the sharp rise in PPI and CPI inflation in 1989-90, which in turn occasioned the Fed's interest rate hikes which triggered the 1991-92 recession. When Polyconomics tried to dispute the prediction, I wrote a long  article called "The Rueffian Synthesis," which tried to explain how we at LBMC had applied Rueff's analysis, and responded to Jude's objections. 

 

I showed that the basic trouble with targeting the price of gold is that, unlike the gold standard, the policy involves buying and selling dollar securities, thus setting up a very roundabout arbitrage in the financial markets and real economy, while the gold standard ultimately involves buying or selling gold, thus tying monetary policy directly to the commodity market. I showed that the lag between changes in the World Dollar Base and their effect on the commodity markets, including the gold price, is simply too long to make the gold-price-targeting policy feasible, since the Fed would always in effect be reacting to echoes of what it and other central banks had done one to three years earlier.

Q: There was a storied meeting between the Supply Siders and President Reagan, a gold sympathizer, to press the case for gold.  It reportedly was handicapped by a lack of consensus among the Supply Siders as to the appropriate parity point to define the dollar, a question posed by Reagan chief of staff James Baker.  Did you attend this meeting and, if not, surely you were thoroughly debriefed about it.  Would you share your recollections?


A: There were actually several important meetings. Jack Kemp and his key advisers, including Jude Wanniski, Art Laffer, and Dave Smick and I from Jack's congressional staff, participated in a briefing session for then-presidential candidate Ronald Reagan in Los Angeles in January 1980 to discuss various aspects of economic policy, including the Kemp-Roth marginal tax-rate reductions (which became the centerpiece of President Reagan's Economic Recovery Tax Act of 1981), energy policy, and restoring dollar convertibility into gold. Since Jack was also the Reagan campaign's issues adviser, we also participated in preparing Reagan's briefing books for the 1980 campaign. And Lew Lehrman spoke to Reagan directly about the monetary issue in the White House and at campaign events. I recall participating in several meetings involving Jim Baker during the Reagan presidencies on tax policy but not on monetary policy or gold. The Reagan diaries reflect frequent clashes involving Jack's criticism of both U.S. domestic and international monetary policy during both Reagan administrations.


Q: You have had a long, productive, and close relationship with Lewis Lehrman.  Would you provide a short personal description of some of the highlights of that relationship?

A: Lew Lehrman exemplifies what Aristotle called the virtue of magnanimity or greatness of soul -- a sign of contradiction in what often seems an age of pusillanimity. I'm proud to have counted him as my mentor, business partner, collaborator and friend for about 35 years. I met Lew for the first time when he visited Jack Kemp's congressional office in the Rayburn House office building, not long after I started working for Jack in 1979. Lew was preparing to run for governor of New York, which he did in 1982. He was Jacques Rueff's protege, had Rueff's complete works published in French, and got Rueff to write his autobiography. Since some of Rueff's works had never been translated into English, when Lew introduced me to Rueff's economic ideas I took a course to read French well enough to read Rueff in the original. Lew had a similar mentoring influence on Jim Grant.

Q:  In The True Gold Standard, Lewis Lehrman describes what once was, and now appears to be becoming, the consensus position among gold standard advocates, such as Steve Forbes, as duly noted by Detlev Schlichter in the second edition of Paper Money Collapse: The Folly of Elastic Money.  Thoughts on what this is likely to look like.

A: The principles of restoring the gold standard are not rocket science, since it's been done before and we know which pitfalls to avoid. There are basically two requirements: First, re-establish the U.S. dollar as a weight of gold, at a parity that would avoid the sort of deflation and unemployment caused when Great Britain returned the pound sterling to gold convertibility in 1925 without taking into account the World War I multiplication of the general price level. In contrast, France returned the franc to a gold basis in 1926 without deflation, inflation, any rise in unemployment, because Rueff had chosen the right parity. Second, all the outstanding official dollar reserves would be converted into long-term government-to-government debts, off the balance sheets of central banks, and amortized over time--much as Alexander Hamilton provided for the Federal assumption and repayment of the Revolutionary War debts contracted by the Continental Congress and Colonial governments. Those debts were all repaid by the 1830s.

Click here to read Part 1.

Click here to read Part 2.

To be continued....


 

 

Kathleen M. Packard, Publisher
Ralph J. Benko, Editor

In Memoriam
Professor Jacques Rueff
(1896-1978)

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