Blogs: Kelly Hanlon
That’s Jeff Miron’s take on the Great Recession of 2007-09. We all share responsibility for the economic collapse and financial disorder which ensued. Of course, it’s slightly more complicated than that. Miron’s shared theory of blame considers the liberal perspective: Wall Street did it. And, to be fair, the Republican perspective: the government did it. But, in reality, according to Miron, “We all did it.”
From the liberal point-of-view, businesses took excessive risks after the repeal of Glass-Steagall regulations. Aggregate demand fell; credit dried up; consumers stopped buying. The government rightly stepped in to purchase goods and services, to reflate the housing market, and to prop-up markets via loose money. Why haven’t things improved? The government interventions weren’t big enough.
From the Republican vantage point, government policies led to excessive leverage by businesses. There was an implicit adoption of the “too big to fail” doctrine which further encouraged excessive risk-taking by corporations. Why haven’t things improved? The government continues to intervene in the market place causing uncertainty and moral hazard.
From the American perspective, “we all did it.” From Miron’s point-of-view, we—Americans—became too optimistic in the mid-1980s. Economists had solved the woes of the business cycle; there was solid economic growth; stock and housing prices were increasing; sophisticated financial instruments were developed, mitigating most risk. And, policymakers were reassuring. Our spending increased; our savings decreased.
But this economic boom could not last forever. It was destined to bust. So what policies should we adopt going forward?
According to Miron, we should focus on free market policies, defined as lowering taxes and decreasing regulatory burdens. Additionally, Miron emphasized the need to reform entitlement programs like Medicare and, to a lesser extent, Social Security. National security expenditures should also be addressed. Miron acknowledges these are long-term solutions but that they are unlikely to help in the short run. In conclusion, Miron suggested that this may be “as good as it gets.”
The fiscal policy reforms that Miron suggests are certainly warranted and are being debated in both houses of Congress and the public square. However, Miron mentioned only briefly monetary policy saying only that in a crisis we should lend freely.
Fiscal policy is a necessary but not sufficient condition economic stability and growth.
Brian Domitrovic, an advisor to TheGoldStandardNow.org, doesn’t think this is as good as it gets. In his landmark work, Econoclasts, Domitrovic summarized Nobel prize-winning economist’s Robert Mundell’s policy prescription in this way,
“Monetary tightening produces a rise in the rate of interest. A rise in the rate of interest attracts foreign capital. Tax cuts bring about domestic expansion and a reduction in unemployment. Domestic expansion does not, however, produce inflation. … With the Mundell policy mix, you get an inflation-free boom.”
At a recent Heritage Foundation conference, Domitrovic extended this argument with historic evidence that economic growth averages have been as high as four to six percent. Under the classical gold standard, the economy was forty times larger in 1914 than it was in 1820. If America continued on that same growth trajectory today, we would have a $30 trillion economy rather than one half that size. Fifteen trillion dollars in lost innovations and productivity is hard to imagine. However, if the choice is between the Miron’s status quo and Domitrovic’s extra $15 trillion, most Americans would choose the latter.
How do we get from here to there? Domitrovic advocates a return to the classical gold standard—the gyroscope of the Industrial Revolution and generator of unprecedented economic growth. The time to adopt a Constitutionally-ordained, empirically-proven, historically-supported, gold-backed dollar is now.
Americans have never settled for the status quo nor have we settled for “as good as it gets.” We should not do so today.
Scott Rasmussen of Rasmussen Reports described the discontinuity between the people and the political class during a seminar hosted by the CATO Institute in New York City in late October. He argued that since before America’s inception, before the “shot heard ’round the world,” that the people’s opinions were several decades ahead of those of their political leaders.
This, of course, begs the question of whether the term “political leader” is an oxymoron. Historically, we tend to think of politicians as leaders, not followers. When we ask our children what they want to do when they grow up, we smile encouragingly when they reply, “I want to be president.” Would our reply be the same if we thought that these men were simply following long-standing trends in public sentiments? Are they?
The story painted by Mr. Rasmussen was mostly bleak. He argued that if we rely on our nation’s politicians for fundamental change as presently desired by the American populace, that there is, quite simply, no hope. As evidence both of public sentiment and of political (or at least of executive) failures, Rasmussen pointed out the successive flip-flops between parties in Congress and the executive since 1992.
Quickly then, Rasmussen dipped his toes into the economic woes facing our country, suggesting that the sentiments of the public changed at the moment of the bailouts—that this move was the modern day equivalent of the “shot heard ’round the world.” The bailouts became the catalyst for change. Once accountability for corporate action was annulled entirely through government subsidized bailouts and subsequent monetary interventions, the people rebelled. In their sophistication, the people rejected crony capitalism but not free market capitalism.
Lewis E. Lehrman, Chairman of The Lehrman Institute and the keynote speaker during the same conference, expounds on this point in his new book, The True Gold Standard. Lehrman’s Monetary Reform Plan
“…establishes a disciplined, clear, and simple framework in which central and commercial banking systems will be required to operate, ruling out subsidy or taxpayer bailout for privileged financial and industrial market participants. Sending millions of small businesses and families to bankruptcy court, while bailing out cartelized institutions, eviscerates free and fair markets and destroys the confidence, incentives, and moral dispositions of all prudent participants.”
Nevertheless, both Rasmussen and Lehrman remain optimistic about America’s future. According to Rasmussen, 81% of the American people still believe in the dream laid out in the Declaration of Independence. And, both agree with the famous words of President Lincoln that “this nation shall have a new birth of freedom; and that this government of the people, by the people, for the people, shall not perish from the earth.”
From Mr. Rasmussen’s reports on the relationship between the public and the political class, let us hope that today’s political leaders learn to follow the people. And, let those courageous leaders who emerge follow Mr. Lehrman’s Monetary Reform Plan to restore American prosperity and confidence. No less than the future of our nation and the principles upon which it was founded are at stake.
A grave peril hangs over the economy of the West. Everyday its situation more and more resembles the one that turned the 1929 recession into the Great Depression. The instability in our monetary system is such that a minor international incident or small economic or financial disturbance could set off worldwide disaster. There is a great deal of concern about this instability, though rarely expressed in terms as stark as I have used, and a number of measures have been suggested for dealing with it. But instead of going to the roost of what is wrong, these would rather prolong for several months or years the erring ways that are responsible for the danger.
The West has no task more urgent than to recognize the disease that infects it, and by curing it, to re-establish in the free world a monetary system that generates lasting stability.
Fifty years ago, the great French economist, Jacques Rueff, penned this introduction to an article in Fortune. Entitled, “The West is Risking a Credit Collapse,” the essay explores what Rueff calls, “the disease,” providing a damning indictment of American monetary policy. Ever prescient, Rueff’s critique may well have been written in 2011 rather than 1961.
Looking at the chronic balance-of-payments deficits, Rueff declares that the “United States was not really required to settle its debts abroad.” That is, “the country with [the reserve] currency is in the deceptively euphoric position of never having to pay off its international debts. The money it pays to foreign creditors comes back home, like a boomerang.” Effectively, then, a duplication of worldwide purchasing power occurs.
In a ground-breaking new book, The True Gold Standard, Lewis E. Lehrman updates and reinvigorates this argument. Lehrman describes the post-Bretton Woods era mechanism of credit-creation sanctioned by the Fed. He says, “The world dollar standard enables America to buy without paying, This perverse mechanism, whereby the reserve currency country issues its own money to finance and refinance its deficits and debts increases potential global purchasing power, creating a demand for goods and assets without producing an increased supply of them—leading, of course, to inflation at home and abroad.
Rueff’s monetary restoration of France’s Fifth Republic provides historical evidence that a program of “truth and rigor” may be carried out, returning an entire nation to prosperity under a stable, convertible currency.
Lehrman—a student of Rueff—outlines a five-step Monetary Reform Plan for America and the world, establishing once again a Constitutional dollar defined in law as a certain weight unit of gold.
As Rueff aptly concluded in his essay some fifty years ago and as Lehrman concludes his new monograph, “America and the world need a twenty-first century international gold standard” to restore financial order and a stable monetary system.
Recovery from the Great Recession of 2007-09 has been painfully slow. Unemployment remains stubbornly high. The housing market is still in arrears. Central bankers, policy makers, and academic economists are running out of ideas. This latter point might actually be cause to celebrate if the outlook were not so bleak.
In a special report on the world economy, Financial Times contributor, Robin Harding, summarized the situation this way,
“Three years after the peak of the Great Recession, the world’s central bankers are like a walking party that has set off for a very long trip in the mountains and remains far from its destination. Despite trillions of dollars of quantitative easing, huge liquidity operations and a range of experiments in central bank communication, the legacy of the financial crisis has not yet been overcome.”
A wedge is being driven between the two monetary policy camps which are largely defined by their willingness (or not) to provide additional stimulus. Members of the “more is better” approach hope to see QE3. Led most publicly by Paul Krugman, they argue that the record-breaking monetary interventions to date were not large enough. Members of the “enough is enough” camp include the likes of Charles Plosser of the Philadelphia Fed who said in June that, “We must be willing to act…This includes taking the right actions at the right time to exit the extreme accommodative policy that is now in place.”
There is a burgeoning third camp: the “less is more” crowd. This does not simply mean the Tea Party, though some members certainly overlap. This means that with a stable monetary standard in place, like the true gold standard, individuals alone choose how many dollars to hold. The credit-creating Federal Reserve and commercial banking systems could no longer systematically supply excess dollars to the market without the production of new goods and services—that is, without real economic growth. These excess dollars artificially increase purchasing power, encouraging runaway budget and balance-of-payments deficits.
Advocates of the true gold standard have history on their side. Proven in the “laboratory of human history,” the classical gold standard provided for long periods of uninterrupted economic growth and general price level stability.
Mr. Lewis Lehrman carefully explains The Dollar Problem and Its Solution in a new essay. He says, “To restore long-term price stability and to sustain an equitable market for growing world trade, the dollar, a monetary yardstick, must again be defined in law as a precise weight unit of gold… A dollar as good as gold is the way out of the monetary maze in which we are currently lost.”
Financial Times report: http://www.ft.com/intl/reports/world-economy-2011
Lewis Lehrman’s article: http://www.thegoldstandardnow.org/featured-articles/780-the-dollar-problem-and-its-solution
The campaign for monetary reform is underway. “We will return to the gold standard within five years,” according to Lewis E. Lehrman during an interview with Judge Napolitano on FreedomWatch on August 18, 2011.
Mr. Lehrman should know. He is leading the charge, reminding his fellow Americans of our shared western history and the vision that our Founders set forth in the Constitution.
In a remarkably short period of time, the United States grew from thirteen ill-managed colonies into the most prosperous nation the world had ever seen. During most of this period, our monetary regime—the gold standard—inspired confidence and trust in market mechanisms, encouraging long-term savings and investment and heretofore unseen economic growth.
That is, until one hundred years ago.
With the creation of the Federal Reserve System in 1913, the Bretton Woods system of the post-Second World War era, and Nixon’s rescission of the gold standard in 1971, a century of decline in the dollar’s value ensued. At the outset of the 1980s, President Reagan inherited a suite of economic problems. Although he seriously entertained the idea of a return to the gold standard in the 1980s—even requesting and reviewing a plan on how to restore convertibility of the dollar to gold—fiscal restructuring, in the form of an overhaul of the tax code, took center stage.
The monetary reform plan was never carried out.
The wild volatility over the last forty years, especially during the economic downturn of 2007-09, provides further evidence that only a dollar as good as gold will restore long-term price stability and lay the foundation for long run economic growth.
America and the world need a true gold standard more than ever. Is America still courageous enough to lead the world in reestablishing financial order? Let’s hope so—the true gold standard is our last best hope.
BY KELLY HANLON: