Key Writings: Mueller on the Gold Standard
John D. Mueller, Lehrman Institute Fellow in Economics at the Ethics and Public Policy Center, delivered these remarks at a panel on "Family -- The First Economy" sponsored by Patriot Voices and the Clapham Group on December 10, 2012, in Washington, D.C.
Let me thank Senator Rick Santorum's Patriot Voices, Mark Rodgers and the Clapham Group for organizing this timely panel on "Family -- The First Economy."
We've all read gloating articles like Maureen Dowd's in yesterday's New York Times, calling the Republican Party "just another vanishing tribe that fought the cultural and demographic tides of history." And: "Yet strangely, Republicans are still gob-smacked by their loss, grasping at straws like [hurricane] Sandy as their excuse."
Actually, this gob was unsmacked. In 25 years of forecasting I've learned to separate what I desire from what I predict. When EPPC's president, Ed Whelan, put a gun to our heads last January, I predicted that Mitt Romney would lose to President Barack Obama, and by an Electoral College total not far from the November result.
Since we have five minutes, or about 500 words, I will make only two points.
First, economic theory is in flux. The subtitle of my book, Redeeming Economics, is Rediscovering the Missing Element. To focus on production and exchange, Adam Smith's Wealth of Nations oversimplified by assuming that "every individual . . . intends only his own gain." Classical and today's neoclassical economic theory reduce all human relations to exchanges. "Neoscholastic" economics is restoring Augustine's theory of gifts (and their opposite, crimes) and Aristotle's theory of distributive justice, which are essential to describing marriage and family.
Presentation to the Tenth Annual UNICEF-Georgetown International Development Conference (IDC).
I'm honored to address the 10th UNICEF-Georgetown International Development Conference (IDC). Since the theme of this year's conference--"Educate, Empower, Enlighten"--begins with education, and international development is simply a broad view of human development, I'd like to discuss the interconnection between longevity, fertility, education, and income. I thought this might be useful background for anyone planning to work in this area.
I'll draw on my book Redeeming Economics, which includes a country-by-country model of fertility that I developed and presented at successive World Congresses of Families: WCF IV in Warsaw, WCF V Amsterdam, last June's Moscow Demographic Summit, this year's WCF VI in Madrid and the Ulyanovsk International Demographic Summit.
In the process, I'd like to compare the likely birth rates if social benefits grow as predicted under the alternatives presented in this past Tuesday's presidential election: President Barack Obama's budget and as proposed by Congressman (and GOP vice presidential candidate) Paul Ryan. If we have time, I'll conclude by discussing the reasons for the recent financial crisis and recession.
Remarks prepared by John D. Mueller, EPPC Lehrman Institute Fellow in Economics, for an Interparliamentary Forum at the World Congress of Families VI in Madrid, Spain, on May 25, 2012.
I'm pleased to participate in this Interparliamentary Forum. At noon, I am scheduled to chair the plenary panel on "The Demographic Winter (How We Got to Where We Are)." Later I am to participate in the panel on "Family and Social Government Policies." Now I'd like to focus on "Practical Steps on Births, Benefits, Booms and Busts," using the USA and Spain as examples.
Let me start by summarizing the findings of a country-by-country model of fertility. Just four factors explain most variation in birth rates among the countries for which sufficient data are available (comprising about one-third of all countries, but more than three-quarters of world population.)
The birth rate is strongly and about equally inversely proportional to per capita social benefits and per capita national saving (both adjusted for national differences in purchasing power). Social benefits and national saving are inversely related to the birth rate because they represent provision by current adults for their own well-being.
When these factors are taken into account, a legacy of totalitarian government is also highly significant in reducing the birth rate (by about 0.6 children per couple).
Spain's housing boom was part of a world-wide real-estate boom and bust caused by the dollar's role as the world's chief official reserve currency. Commensurate expansions and contractions of high-powered dollars--the World Dollar Base--preceded the gyrations not only of the oil price but also housing prices from 2000 to 2009. Therefore, I repeat a proposal I made at last year's Moscow Demographic Summit: All countries seeking to end the boom-bust cycle should join in supporting a reform of the international monetary system, which would repay all outstanding dollar and other official reserve currencies and restore prompt settlement of payments in gold: a system that worked well for hundreds of years and can do so again.
John D. Mueller, Lehrman Institute Fellow in Economics at the Ethics and Public Policy Center, presented the following lecture at the Family Research Council in Washington, D.C., on April 11, 2012.
I'd like to thank the Family Research Council for its gracious invitation to deliver this lecture, and to Rob Schwarzwalder for both his generous introduction and his leadership. The topic I'd like to discuss this afternoon is "Redeeming Economics: How Federal Budgets Affect the American Family." ISI Books recently published my book, Redeeming Economics: Rediscovering the Missing Element. As I will explain, the original element missing from modern economics is the one that describes our interpersonal relations of love and hate. I should add that my relationship with FRC goes back a long time. In fact, the substance of several of the chapters originated in articles and research published in FRC's Family Policy journal. I see Bob Patterson in the audience, who developed it from a monthly newsletter into a first-rate journal. Though I've attended many events here at FRC, I think my last formal presentation was in 2008, when I presented a paper on "Causes and Cures of Demographic Winter" for a panel when the film "Demographic Winter" was screened here.
I'd like to accomplish three things today which might at first sight seem unrelated.
First, I'd like to offer "a brief, structural history of economics," in order to show that the most important element of the original scholastic economics has been missing since its deliberate omission by Adam Smith, and how its absence has caused several major problems with today's neoclassical economics, particularly its understanding of marriage and the family. I'll illustrate with two such problems: the first offered by Steven D. Levitt and John J. Donohue III's famous claim that legalizing abortion in the 1970s must have reduced crime rates starting in the 1990s, and the second explaining the failure of existing economic theory to explain the "demographic winter" which has already engulfed the rest of the developed world.
Second, I'd like to pose the question, not "WWJD?" but "WDJD: What Did Jack Do?" referring to Jack Kemp, for whom, as Rob mentioned, I worked for ten years before and during both Reagan administrations. I believe that posing this question will help us understand why the fiscal policy devised by Jack Kemp and implemented by Ronald Reagan was both politically and economically successful, and also why conservatives since abandoning it have so often seemed to snatch defeat from the jaws of victory.
The third and final part of my talk might be called "Benefits or Babies: The Obama and Ryan Budgets and the U.S. Birth Rate." I'll show that the choice our government is now making is whether the United States will join the rest of the developed world by sinking into "demographic winter" and steadily declining in relative size and importance, or else maintain the demographic component of American exceptionalism.
From the Heritage Foundation “Conference on a Stable Dollar: Why We Need It and How to Achieve It.” Session III: “What Changes Should Congress Make?” Arlington, VA, 6 October 2011.
The stability of the U.S. dollar has varied widely in history. This variation is explained by two factors: first, how policymakers set the monetary standard for the dollar; but also whether policymakers in other countries use securities payable in dollars as their own monetary standard—that is, use the dollar as their official “reserve currency.”
Let’s consider the three problems Congress caused by using its Consttutional authority over the monetary standard by abandoning the gold standard.
By President Ronald Reagan’s self-assessment, the Reagan Revolution was incomplete when he left office. “With the tax cuts of 1981 and Tax Reform Act of 1986, I’d accomplished a lot of what I’d come to Washington to do. But on the other side of the ledger, cutting Federal spending and balancing the budget, I was less successful than I wanted to be. This was one of my biggest disappointments as president. I just didn’t deliver as much to the people as I’d promised.”
President Reagan’s disappointment can be traced to the unintended consequences of adopting Milton Friedman’s “allowance theory” of federal budgeting under the paper dollar standard. “I have long favored cutting taxes at any time, in any manner, by as much as possible as the only way of bringing effective pressure on Congress to cut spending,” Friedman explained. “Like every teenager, Congress will spend whatever revenue it receives plus as much more as it collectively believes it can get away with. Reducing spending requires cutting its allowance.”
C. Northcote Parkinson famously theorized that “work expands so as to fill the time available for its completion.” Parkinson’s Law was the history professor’s attempt to explain the inexorable growth of bureaucracy. Friedman’s allowance analogy amounts to Parkinson’s fiscal corollary: public spending expands to absorb all available tax revenues. The strategy failed in practice by overlooking Parkinson’s debt corollary: public borrowing expands to absorb all available means of finance. If tax revenues are Congress’ “allowance,” then purchases of Treasury securities by government trust funds, the Federal Reserve, and foreign central banks are its “credit cards.” The congressional teenager’s spending won’t be fazed by a cut in allowance, unless the indulgent parents also cut up the credit cards. Thus, while U.S. public debt jumped by more than 20 percentage points of GDP between 2007 and 2009, debt to the non-bank public debt stayed below 19 percent—because most of the increased debt was financed by central banks and trust funds. And the Congressional Budget Office (CBO) predicts that U.S. public debt will roughly double again to more than twice the size of our economy.
Reagan’s Unfinished Monetary Reform. In 1980, then-Governor Ronald Reagan’s advisers agreed that it was necessary to limit the power of the Federal Reserve governors who make monetary policy. But nothing was done because they disagreed about the policy rule. “Domestic monetarists,” following Milton Friedman, proposed that the Federal Reserve regulate the quantity of bank reserves and the money supply. Many “supply-siders” advising Jack Kemp proposed to make the value of a paper dollar equal by law and convertible into a weight of gold, as it was for most of the two-hundred-plus years of U.S. history. But “global monetarists,” following Robert Mundell, advocated at least a temporary return to the 1944 Bretton Woods gold-exchange system, while others of us heeded Jacques Rueff’s warning that only restoring a multilateral gold standard without foreign-exchange reserves would be effective.
Why is it possible now to achieve what Reagan could not? Though they often disagreed, Friedman and Mundell exhibited colossal integrity in acknowledging that changing circumstances had made their earlier proposals infeasible. As Friedman summarized in a Financial Times interview, “The use of quantity of money as a target has not been a success. I’m not sure that I would as of today push it as hard as I once did.” According to a recent Wall Street Journal interview with Judy Shelton, Mundell believes that “it would not be possible today to forge a monetary system with the dollar as the key reserve currency, as President Franklin Roosevelt and Treasury Secretary Henry Morgenthau did in the 1940s. ‘To be fair, America’s position is not nearly as strong now,’ he concedes.’”
Thus, it is now finally possible to restore Alexander Hamilton’s first principle of successful economic policy: don’t finance the federal budget by printing money. As Rueff showed, the essential requirement is that the major countries agree to replace all official foreign-exchange reserves with an independent monetary asset that is not ultimately some particular nation’s liability: gold.
There are two conditions for the success of such a reform. First, the gold values of all national currencies must be properly chosen to preclude the deflation of wages and prices that occurred in the 1920s and 1930s in those countries (notably Britain and the United States) which tried to keep parities that did not allow for past wage and price inflation by substituting foreign exchange for gold reserves. Other countries, notably France in 1926 and 1959, restored gold convertibility successfully with strong economic growth but without inflation, deflation, or unemployment.
Second, existing official foreign exchange reserves must be removed from the balance sheets of monetary authorities by consolidating them into long-term government-to-government debts that would be repaid over several decades—much as the Washington-Hamilton administration funded the domestic and foreign Revolutionary War debt.
As President Reagan asked, If not us, who? If not now, when? And if not in Washington, DC, where?