The True Gold Standard (Second Edition)
Jack Kemp and the Gold Standard
Meet Rep. Kevin Brady (R-TX): the Six Trillion Dollar Man. Brady recently took the chair of Congress’s arguably most important inner think tank, the Joint Economic Committee. From this perch Brady is proposing to provide the combination to open the lock of a safe that holds $6 trillion in potential revenues for the federal government. (That is well over 20 times the value of all the gold in Fort Knox.) Without raising taxes. Game changer.
Brady is positioned to become America’s new Jack Kemp. If this works, he, along with a new generation of other growth-oriented Representatives, will unleash a wave of (worldwide) equitable prosperity. Kemp rode the Laffer Curve to greatness. Brady is preparing to hitch the world to the Kadlec Curve, named after Laffer protégé (and Forbes.com columnist) Charles Kadlec.
Kadlec formulated an insight in a Forbes.com column late last year that, little by little, is beginning to rock Washington. He found it hidden inside a footnote of a Congressional Budget Office report.
Because real growth currently has been, and is, trending well below the CBO assumption of 2.8%, the scope of 4% growth should be considered $6, rather than $4, trillion in “enhanced” federal revenues.
If the great football coach Vince Lombardi was alive today, he could modify his famous speech, "What it Takes to Be Number One," to address our fiscal problems:
"Growth is not a sometime thing. Growth is an all-time thing. You don't grow once in a while, you grow all the time. There is no room for stagnation. Stagnation is a game for losers, played by losers. "
When Republicans don't stand for growth, they don't stand a chance. If authentic growth is not an option, the electorate chooses redistribution over austerity. Austerity surrenders to stagnation and puts Republicans on a losing battlefield where cutting entitlements is too easily framed by the opposing team as redistribution from the poor to the rich. How's that working for us?
Federal finances are ultra-sensitive to economic growth. Chuck Kadlec, economic advisor to the late Jack Kemp and more recently to Herman Cain's presidential campaign, pointed out in his recent Forbes column that every one-tenth of one percentage-point increase in the real rate of economic growth reduces the deficit over 10 years by $314 billion.
On a present value basis, increasing the rate of real economic growth by a tenth of a percent is 27 times more beneficial to federal finances than reducing spending as a share of GDP by a tenth of a percent. Why choose the harder course, there are no bonus points for degree of difficulty.
The Heritage Foundation published a symposium on cutting the budget in the Winter 1986 issue of its Policy Review (since 2001, published by the Hoover Institution). A number of excellent proposals were made, but I would like to focus on the gem contributed by the late journalist and columnist Warren T. Brookes.
Brookes began by stating that "conservatives need to understand that without basic monetary reform there is no way to balance the U.S. budget, with or without tax increases and budget cuts, and even with the most optimistic GNP growth projections." He then offered a 3 part solution:
With all of the talk about the "fiscal cliff" and raising the debt ceiling yet again, it is clear that the problems of the Federal budget and debt, and especially the cost of servicing the Federal debt, have certainly not gotten any better since Warren Brookes's solutions were published (and ignored) in 1986.
In the opening days of the new session of Congress, a number of bills have been introduced that would partially enact these solutions:
We’ll see just how serious Washington, D.C. is about the budget and debt crises.
A long time ago in a galaxy far, far away, America – and the world around it - was rapidly descending into Economic Hell. It was a protracted, confused, process called “the ‘70s.” A number of problems were causing recession, unemployment, and suffering, quantified by “the Misery Index” at twice the depth as today’s. America also was enmeshed in a Cold, yet latently nuclear, War. This held a very real risk of world annihilation.
Two men filled with moral courage, both “deuces,” gave us an era of peace and prosperity. They were deuces, low face value cards in the deck, not jokers, and designated themselves wild. The wild deuce trumps. These two extraordinary men transformed the world.
One of these, a backbencher in the House of Representatives, turned the world economy from misery to affluence. His name was Jack Kemp, a Representative from Buffalo, New York, and former football quarterback. He chaired no committee. He was not part of House leadership. He did not have SuperPAC donors behind him or the support of a MoveOn.org-scale entity.
Kemp had just four assets.
Kemp had a strong intellectual curiosity, one blessedly exempt (he was a physical education major) from having been deformed by the nonsensical economic dogmas then prevailing. He had the humility required to learn from outsiders to the jejune consensus — the pre-Nobel Robert Mundell, Art Laffer, and the odd but brilliant Jude Wanniski. The minds he sought out gave him his Big Idea: lower tax rates and solid monetary policy (which he ultimately concluded meant the classical gold standard).
I’ve been asked if I have any regrets. Well, I do. The deficit is one.” — Ronald Reagan’s farewell address.
When Ronald Reagan was elected president the Dow Jones Industrial Average hovered around 1,000 (less than 2,800 inflation adjusted) — and had dipped, under President Carter, as low as 759. Unemployment stood at an unacceptable 7+%. The Soviet Union was aggressive, bellicose, and, in the eyes of the Western policy elite, could be but contained, not challenged. At the end of Reagan’s eight years in office, the Dow had tripled in value, on its way much higher. Job growth was vibrant. The USSR was well on its way to dissolution.
How did this happen? Rep. Jack Kemp and his team of visionary economists and policy advocates inspired what became known as “the Supply-Side Revolution”. The “cabal,” as it was then known, pressed for a fundamental policy transformation away from high tax rates (70%) and easy money (13+% inflation) to low marginal tax rates and good money. They faced enormous ridicule by the policy elites, being mocked by, among others, Reagan’s foremost rival for the presidency, George H.W. Bush, who derided the modern Classical economic thinkers as practitioners of “voodoo economics.”
Ronald Reagan, adopting the Kemp formula, had a lot on his plate. While restoring economic growth and confronting the expansion-minded totalitarian Soviets, something got left behind: cutting federal spending and thereby balancing the budget. It is this unfinished business which Rep. Paul Ryan, rising to Congressional Budget Committee chairman and now Vice Presidential nominee-designate, took on as his Quest.
The fundamental things don’t change as time goes by. The great anti-federal-profligacy hawk within the original group of Kemp advisers was Lewis Lehrman. According to Evans and Novak’s book on this era, The Reagan Revolution (Dutton, 1981, p. 118), “Lewis Lehrman… disagreed fundamentally with his friends Laffer and Wanniski on the budgetary question. Lehrman believed dramatic and drastic expenditures reduction was no less imperative than tax reduction, rejecting Kemp’s notion of greater priority for the latter.”