Blogs: Kelly Hanlon
In tornado alley, the difference between accurately and inaccurately forecasting the trajectory of likely tornadic activity is profound. With a moment’s notice, an entire town can be swept off the map, devastating entire regions. The photos shown in the aftermath—like the recent images from Henryville, Indiana, and West Liberty, Kentucky— are heartbreaking but the devastation among those who have lost everything lingers on long afterwards.
Although those outside of tornado alley are often sympathetic when the photos are shown on the evening news, they soon forget about the people and towns decimated and move on with their lives. But the next time storm clouds threaten, local folks heed the warnings both from the meteorologists and using their own common sense—they look up at the sky and make a judgment about the likelihood of bad weather.
You see for those who grow up in tornado alley, there is a certain look to the sky just before a twister drops out of the heavens and torments those on earth. Yes, radar helps to predict the locations and timing of tornadoes but it is an imperfect science. There are frequently “radar-indicated” tornadoes which never touch down—these are analogous to the boy who cried, “Wolf!” and lessen the chances that people will take shelter the next time bad weather strikes. Human experience—learning to interpret the forecast and “read” the sky—goes a long way in figuring out when to go underground or not.
In the same way that meteorological forecasts—coupled with experience and a bit of common sense—are helpful in escaping the brute force of Mother Nature, economic forecasts—preferably also coupled economic experience and with common sense—provide useful indications to the marketplace. In either case, however, inaccurate forecasts—and lack of experience or lack of common sense—can have serious implications.
When economic forecasts turn out to be wrong, economists are apt to say “this time was different.” They proceed then to cite the different variables at play, claiming an inaccurate prediction through no fault of their own. Their forecasts, thus, turn out to be largely academic exercises outside the “laboratory of human experience.” But economic headwinds, like those spawned by tornadic activity, have profound and permanent effects.
A recent Wall Street Journal article by Benn Steil provocatively titled, “Why We Can’t Believe the Fed,” provides damning evidence that our nation’s leading public economists are often wrong. In fact, the Fed itself said, “its historical forecast errors are large in economic terms.”
Coupled with the experience of the last one hundred years under the rule of the Federal Reserve, economic participants would do well to consider the evidence and evaluate risks according to experience and common sense. Time will tell whether economic actors will take heed or, whether as Mr. Steil predicts, they will take shelter, casting doubt over “official Fed targets and expectations.”
September 11th. Iraq. Afghanistan. Iran. Weapons of mass destruction. Economic calamity. Foreclosure. Record unemployment.
According to Secretary of Defense Leon Panetta, these factors conspired to make the last decade one of turmoil. “Uncommon courage” combined with the strength and resilience of the American spirit will be required of our public servants and citizen leaders to forge ahead, securing the American dream for generations to come.
In a wide-ranging address hosted by the McConnell Center at the University of Louisville on March 1, 2012, Secretary Panetta cited the ever-growing national debt and federal deficit as one of the greatest threats to America’s national security. The Secretary argued that we needed to make comprehensive decisions about both federal spending and revenues so that we may “put America’s fiscal house in order.”
The grave threat posed by our national debt and deficit were crystallized when the Secretary cited three examples of his leadership during the Q&A period, all having to do with deficit reductions. While serving on the House Budget Committee (1979-85) and as its Chairman (1989-1993), Panetta helped develop deficit reduction plans, totaling nearly $1 trillion. Then, as the Director of the Office of Management and Budget under President Clinton, Panetta once again assisted in cutting the deficit by roughly $500 billion. As Secretary of Defense, Panetta has proposed a reduction in defense spending by nearly $500 billion over ten years (he continues to ask Congress to eliminate further defense spending cuts of another $500 billion).
In combination, Panetta has been instrumental in cutting more than $2 trillion from the federal deficit (and spending) over the past three decades. And, although it went without saying, Mr. Panetta seemed all too aware of the irony, knowing that during fiscal years 2010-12 the federal deficit has grown at an average annual rate of $1.3 trillion. Instead of pointing this out, the Secretary simply concluded by saying that he “regrets that we’re in the same damn hole again.”
America has overcome crisis and adversity time and again with leadership, sacrifice, and a willingness to fight—we must bring these same traits to bear today to secure our national sovereignty.
Secretary Panetta offered the audience a short story to better illustrate the American spirit and our willingness to fight: a rabbi and priest go to a boxing match in hopes of better understanding one another’s religions. Before the match begins one of the boxers crosses himself so the rabbi asks the priest what that means. The priest replies, “not a damn thing unless he fights to win.”
Secretary Panetta likened the tale to modern America. Americans, he says, have grown complacent, convincing ourselves that everything will be fine. Panetta pauses before conlcuding, “it doesn’t mean a damn thing unless we’re willing to fight for it. We all pledge to fight for the American dream; for an America that will be of, by, and for the people.”
After losing the 1880 Republican presidential bid, and after having his term expire as Treasury Secretary in 1881, John Sherman was elected once again to the United States Senate where he served from 1881-1897. During this period, Sherman would bid unsuccessfully twice more for the Republican presidential nomination in 1884 and 1888.
In 1890 the Bland-Allison Act, which required the Treasury to purchase silver at a high price, was replaced by the Sherman Silver Purchase Act, named after Senator Sherman. Responding to demands of miners and farmers, the Sherman Silver Purchase Act was enacted to boost the economy and to encourage inflation which would allow farmers to pay their debts with cheaper dollars. Under the Act, the U.S. government was required to purchase 4.5 million ounces of silver bullion every month – twice the amount mandated by the Bland-Allison Act.
Simultaneously, the McKinley Tariff was proposed, raising the average duty on imports almost fifty percent to protect domestic industries from foreign competition. This tactic of protectionism, supported by the Republicans and opposed by the Democrats, was not popular with the American public who suffered a steep increase in the cost of products after the tariff was enacted.
The problems imposed by the Sherman Silver Purchase Act and the McKinley Tariff were compounded by the Panic of 1893 which saw the collapse of the railroad industry and agricultural prices—which in turn started a run on the banks. President Cleveland oversaw the repeal of the Sherman Silver Purchase Act in 1893 and the crisis was eventually resolved when J.P. Morgan formed a banking syndicate that saved the United States from bankruptcy with a massive gold loan. However, the Panic of 1893 led the United States into its worst economic depression (1893-97) it had experienced until that point with unemployment reaching a peak of 19%. Democrats blamed the Sherman Silver Purchase and McKinley Tariff Acts for causing the economic depression, while Republicans held responsible the Democrats and President Cleveland who were in power.
Senator Sherman’s legislative reign was not over. The legislation which still bears his name is the Sherman Anti-trust Act of 1890. Signed into law by President Benjamin Harrison on July 2, 1890, the Sherman Anti-trust Act sought to eliminate monopolies and “to protect the consumers by preventing arrangements designed, or which tend, to advance the cost of the consumer.” American courts continue to use this legislation in deciding cases in which monopolies or cartels are being challenged.
Sherman’s last public office would be Secretary of State. In 1897, President William McKinley nominated Sherman as Secretary of State. Although the Senate confirmed his appointment, Sherman proved inept at foreign affairs, having been largely appointed because of his favorable standing in the Republican party. After slightly more than a year, on April 27, 1898, Sherman resigned and was replaced by Assistant Secretary of State William R. Day.
Sherman retired to private life. He died in Washington at the age of 77 on October 22, 1900.
With average annual federal deficits of more than $1.3 trillion for fiscal years 2010-12, and with Secretary of Defense Leon Panetta calling the deficit a major threat to national security, it is high time that America considers a comprehensive economic policy, uniting monetary and fiscal policies.
As Judy Shelton argues in A Guide to Sound Money, fiscal and monetary policy are intricately and dangerously intertwined. Citing former Fed Chairman Alan Greenspan in 1966, “[Greenspan] noted the ambitions of statists to promote expansionist government through unlimited credit creation and concluded: ‘Deficit spending is simply a scheme for the “hidden” confiscation of wealth’” (18).
So, how does today’s Fed measure up?
In a recent Wall Street Journal article, economist Benn Steil highlighted the Fed’s startling inability to accurately forecast the very economic indices that its policies seek to influence.
Looking at the Fed’s performance over the twenty year period between 1986 and 2006, private forecasters more accurately predicted next year gross domestic product (GDP) and CPI along with unemployment and Personal Consumption Expenditures (PCE). The Fed, according to Steil’s article, concluded that “its historical forecast errors are large in economic terms.”
Looking ahead, Mr. Steil argues that “since history contradicts the notion that the Fed can safely pledge interest rates three years out, there is a significant likelihood that the credibility of the Fed’s new inflation target will crumble as it keeps interest rates down despite rising prices, or that its effort to persuade the market that the rates will stay near zero will end in shambles.”
Steil concludes that “the result of [Mr. Bernanke’s transparency] effort will be very different: to increase the level of distrust in markets surrounding official Fed targets and expectations.”
If the Fed is unable to make accurate forecasts about key economic indicators and federal spending remains out of control, what, then, is the solution which unites fiscal and monetary policy while promoting long-term economic growth? A return to Constitutional money, backed by precious metal.
According to Shelton, even Greenspan thought
John Sherman, younger brother to Civil War General William Tecumseh Sherman, was born in 1823 in Mansfield, Ohio. Trained as an engineer through his work on canals, he later studied law and was admitted to the bar in 1844. Thereafter, he took an interest in politics and held public office for the better part of his adult life.
In 1854, he was elected as a Representative from Ohio’s thirteenth district. Between 1859 and 1860, he vied to become Speaker of the House. After an unsuccessful bid for Speaker, Sherman became chairman of the House Ways and Means Committee from 1860-61.
When Salmon P. Chase resigned from the Senate in the spring of 1861 to serve as President Lincoln’s Secretary of the Treasury, John Sherman was elected to fill Chase’s then-vacant Senate seat. Sherman served in the Senate until 1877 and for twelve of those years (1863-65 and 1867-77) served as the chairman of the Senate Finance Committee.
In February 1862, Sherman became the leading Senate champion of the Legal Tender legislation which sought to allow the Union to issue up to $400 million of unbacked paper currency—so-called “greenbacks.” The government issued greenbacks in July 1862 and March 1863, both times for $150 million.
Having dealt with the nation’s currency, the Lincoln Administration and Congress confronted the need to reform the banking system in 1863. The chief advocate for the banking bill was Senator John Sherman, a strong fiscal conservative who long believed in limiting government expenditure.
During Reconstruction, Sherman continued to play a role in shaping fiscal and monetary policy. Treasury Secretaries George S. Boutwell and then William Adams Richardson sought to expand the money supply in the hope that it would trigger an economic recovery. Both Boutwell and Richardson contended that, though Congress had mandated $356 million as the minimum greenback circulation, the old Civil War statutes still authorized a maximum of $400 million, thereby giving them a reserve of $44 million. While the Senate Finance Committee led by John Sherman disagreed, no legislation was passed to assert the Committee’s opinion. Starting in 1872, Boutwell and Richardson used the “reserve” to expand the greenback to $382 million in response to the Panic of 1873.
To restore confidence in the U.S. currency, Congress passed the Resumption Act of January 14, 1875, which returned the government to specie payments and reduced greenback circulation to $300 million. The Secretary of the Treasury was directed to “redeem in coin” legal tender notes presented for redemption on or after January 1, 1879. As a result, the currency began to strengthen.
Under the presidency of Rutherford B. Hayes, specie payments resumed. This was possible because of the sale of U.S. bonds in exchange for gold under now Treasury Secretary John Sherman who served in this capacity throughout the Hayes Administration. By 1879, the U.S. government had accumulated enough gold reserves to carry out the intent of the Resumption Act. This knowledge that the government could redeem each greenback or bank note at par in gold made the public favorably inclined to keep using the more convenient paper currency.
BY KELLY HANLON: