The True Gold Standard (Second Edition)
Key Writings: Domitrovic on the Gold Standard
How much should this economy be growing? More than 1.8%, the first quarter number for 2011, that’s for sure. But how much, exactly?
Here are the basic trends. In the long, quarter-century booms of the second half of the 20th century, the economy grew at 3.3% per year. This was precisely the rate of GDP expansion from 1945 to 1973 and 1982 to 2007.
But coming out of deep contractions, the rate of growth was a point higher, some 4.5% per year, for extended runs. 1947-1953, for example, a period following a steep GDP trough, growth averaged 4.6% per year. After the three Eisenhower recessions of 1953, 1957-58, and 1960, the JFK-LBJ years of 1961-1969 saw growth at 4.8% annually. And the Ronald Reagan “seven fat years” of 1982-1989, which put stagflation to pasture, had growth of 4.3% per year.
Circa 4.5% per year coming out of serial or otherwise lousy recessions, settling into a long-run average of 3.3%. That’s our history, that’s the precedent.
So what’s up with the 1.8%, and this on the heels of the epic panic of 2008-2009? The number is lousy, and its company in previous quarters is no great shakes either. In 2010, supposedly the first full year of recovery, the economy grew at a 2.9% rate. The comparable year of the Reagan recovery, 1984, saw two and a half times that number, 7.2%.
The word getting around, the explanation du jour, is that we’re in a new normal. Things just aren’t that easy any more, people are now apt to say, especially compared to the wonder years of “postwar prosperity.” Competition from abroad is too stiff at this point. The burdens of government are too large and intractable. Our best days are behind us.
A corollary of this argument is that any proposed solution – say the economic plans of Representatives Eric Cantor or Paul Ryan – whose goal is to get growth on the old, classic track is dreamy and therefore unserious. Kevin Williamson said as much on Larry Kudlow’s television show the other day and again from his post at National Review.
Christina Romer is at it again. A few months ago, the president’s former top economic advisor made a spirited defense of the idea that there is a trade-off between inflation and unemployment, despite the fact that half a dozen Nobel Prizes have been awarded for saying this argument is junk science. Now, in her New York Times column, Romer is saying that free-marketeers are inconsistent unless they acquiesce to a weak dollar. Flail twice, shame on you.
Romer is criticizing the notion, widely held across the globe, that the dollar should be strong – that the U.S. currency should consistently be able to buy a good deal of foreign currency, the euro, peso, renminbi, whatever. In Romer’s view, these who adopt this position don’t respect the law of supply and demand. “The exchange rate is a price much like any other price, and is determined by market forces.”
You hear this argument all the time. Why shouldn’t currencies float against each other? If the government has a strong dollar policy, this can only mean that it is subverting market processes. Properly, the government should stay neutral and non-interventionist.
A true advocate of free markets would wish money to be treated like any other good or service, the argument runs: laissez faire. When the price (in this case, the exchange rate) goes up or down, it’s just a matter of consumer preference. “The point is that there is no universal good or bad direction for the dollar to move,” as Romer wrote in her column.
Then she releases punches. “Perhaps it is time for a more adult conversation. The exchange rate is the purview of market economics, not of the Treasury or strong-dollar ideologues.” Yet to say such things, she adds, “openly risks being branded not just an extremist but possibly un-American.”
Heard a lot about “core inflation” from Federal Reserve chairman Ben Bernanke lately? You haven’t, because two months ago his handlers had him stop using the term. Now he uses substitutes, such as “headline” versus “underlying” inflation.
What’s with the jargon? Everyone knows that prices are going up. Corn on the cob that used to sell a dollar a bushel is now a dollar each. Talk about core inflation: These days even cobs (which feed pigs, after all) at the center of the fruit of the stalk are worth a pretty penny.
Everything’s up — tomatoes, bacon, gas, you name it. And as only makes sense, the consumer price index for the first quarter of 2011 came in at an annual rate of 6%. This is a level last hit for the year in 1982 and was the very rate in 1976 and 1977: the bad old days of stagflation. And wouldn’t you know it, our GDP and employment growth stinks right now too. If they make a TV program about our day and age, they should call it “That ’70s Show.”
Central bankers’ prodigality has caused this situation. Quantitative easing and such leads people to doubt the value of the dollar and makes producers mark prices up. Yet the Fed’s tactic in the face of this reality is to play word-games. Inflation is not beginning to ravage the land, the argument runs, in that “core” – ok, “underlying” – inflation isn’t so bad. If you take out food and energy, “headline” stuff, everything’s normal.
Well I guess so then. But nourishment and movement are precisely the two things that Aristotle said distinguish animals first from rocks and then plants. These are not trivial categories of goods, as nobody needs to be told. And it’s not just food and energy. Look at raw materials beyond those used for energy: all up in price. Gold leads the way at $1500 an ounce.
“It is not clear to this day how anxious Stalin was to win the war,” wrote historian extraordinaire Paul Johnson in 1983 in his matchless chronicle of the 20th century, Modern Times. The war was the Spanish civil war – a conflict now at the forefront of attention given the big premiere weekend of the movie There Be Dragons.
In the movie, Republican fighters encountering the uprising of Francisco Franco can’t figure out why their government back in Madrid rarely sends equipment to the front. As well they should have wondered. When Franco first went on the attack in 1936, Republican Spain had one of the biggest gold stocks in the world, gold which the government promptly arranged to exchange for war materiel.
“Arranged” being the key word. Soviet premier Joseph Stalin indicated that he would supply Spain with tanks and such in exchange for most of its gold. The condition was the gold had to be shipped first; then, count on it, the materiel would come. It had all the earmarks of a bad deal, not least because it was unclear if the Soviet Union had functioning factories that could produce and ship useable output.
Stalin had his eye on the Spanish gold because Spain had a mother lode of it. This was owing to the fact that twenty years prior, Spain had been neutral in World War I. During that war, Spain exported so much to the belligerents, without being able to buy in return, that it stacked up foreign exchange and turned it in for gold. The same thing had happened across the neutral nations, from Argentina to Holland to the United States.
You’d think this would have provided a basis of prosperity and consumption for the Spanish people, or at least the Spanish government. Which is precisely why Stalin wanted the stuff. His “five-year plan” of economic renewal was in shambles, its record a 25% population loss below baseline. Muttering about the grossness of the failure had become so endemic in the USSR by 1936 that Stalin was resorting killing two million critics, real or otherwise.
The USSR was facing certain demise – the nation was starving, the government broke – unless something like a $500 million gold windfall from Spain emerged out of the ether. The astounding thing is that the Republican government acceded to the whole of Stalin’s conditions. The gold was shipped, and in turn trickled in a few atrocious bits of equipment. The materiel was so lousy that the Republicans routinely left it on the battlefield for Franco’s soldiers to pick up for themselves.
Over the past 16 years, we have seen a remarkable transformation of the United States' fiscal picture.
In 1995, the federal budget deficit was spiraling downward. At 2.2% of GDP, the deficit was in its third year of decline, a trend that held so strongly that the budget went into surplus from 1998 to 2001. Deficits roared back in the 2000s, moderating a bit before our latest crisis took them to a stratospheric 11% of GDP.
BY BRIAN DOMITROVIC: