From Liberty Law, Brian Domitrovic explains the damaging impact of Milton Friedman’s opposition to the gold standard and floating exchange rates.
In The WSJ, Don Luskin highlights the negative incentive effect of 2013’s tax rate increases. On The Kudlow Report, Stephen Moore debates Keynesian economics:
The WSJreports the decline in labor force participation to 1981’s level. At The American, James Pethokoukis suggests the true unemployment rate is 11.1%. IBDexplains that unemployment is substantially higher than the official number. In The WSJ, Holman Jenkins argues the best solution for the eurozone crisis is for Germany and other strong economies to withdraw and establish a new currency:
Can we admit now the simple lesson is against excessive debt? Don't be impressed by those who protest that Spain and Ireland were brought down by private-sector extravagance. If we've learned anything, in a debt crisis the distinction between public and private disappears. Too, a closer look shows the Irish state an intimate participant in Ireland's housing boom, collecting 40% of the price of every new home in taxes. In Spain, regional governments owned or controlled the lenders that financed the construction binge. A fixed exchange rate system is an especially unforgiving environment for a welfare state that destroys its ability to create wealth. But the universal lesson is: Don't be a welfare state that destroys its ability to create wealth.
In Forbes, Peter Ferrara argues Mitt Romney’s economic platform is practical versus the President’s extremism.
At The American, Pethokoukis refutes Paul Krugman’s claim that wealth inequality contributed to the credit boom. On International Liberty, Dan Mitchell notes an example of the Laffer Curve at work. At Forbes, Nathan Lewis examines how to modernize Social Security. From Bloomberg, James Grant discusses the Fed and markets:
In The NY Review of Books, Paul Krugman advocates higher deficits and inflation.
From Forbes, Ralph Benko revisits the sage wisdom of Arab historian Ibn Khaldun.
In The WSJ, Andy Laperriere highlights the negative effects of the Fed’s quantitative easing and zero interest rate policy. At The American, James Pethokoukis reports a study that rebuts claims that inequality caused the financial crisis, instead linking the mortgage crisis to central bank error. On The Kudlow Report, Mitt Romney discusses the economy and his tax cut plan:
From Bloomberg, Amity Shlaes argues Milton Friedman would disapprove of Ben Bernanke’s policies. In Forbes, Louis Woodhill recommends Kansas reform its tax code. At The American, James Pethokoukis suggests all tax rates may rise if the President is reelected. On Kudlow, Steve Forbes sounds positive about Romney:
In Forbes, John Tamny highlights economics lessons from the film Undefeated.
From last month in The Washington Post, Dylan Matthews explains Modern Monetary Theory.
At The Freeman, Ivan Pongracic Jr. explains Milton Friedman’s view of the Great Depression.
From his 1999 Nobel speech, supply-side guru Robert Mundell outlines his view of the Depression:
World War I made gold unstable. The instability began when deficit spending pushed the European belligerents off the gold standard, and gold came to the United States, where the newly-created Federal Reserve System monetized it, doubling the dollar price level and halving the real value of gold. The instability continued when, after the war, the Federal Reserve engineered a dramatic deflation in the recession of 1920-21, bringing the dollar (and gold) price level 60 percent of the way back toward the prewar equilibrium, a level at which the Federal Reserve kept it until 1929.
It was in this milieu that the rest of the world, led by Germany, Britain and France, returned to the gold standard. The problem was that, with world (dollar) prices still 40 percent above their prewar equilibrium, the real value of gold reserves and supplies was proportionately smaller. At the same time monetary gold was badly distributed, with half of it in the United States. In addition, uncertainty over exchange rates and reparations (which were fixed in gold) increased the demand for reserves. In the face of this situation would not the increased demand for gold brought about by a return to the gold standard bring on a deflation? A few economists, like Charles Rist of France, Ludwig von Mises of Austria and Gustav Cassel of Sweden, thought it would….
Rist, Mises and Cassel proved to be right. Deflation was already in the air in the late 1920's with the fall in prices of agricultural products and raw materials. The Wall Street crash in 1929 was another symptom, and generalized deflation began in 1930. That the deflation was generalized if uneven can be seen from the percentage loss of wholesale prices in various countries from the high in 1929 to September 1931 (the month that Britain left the gold standard): Japan, 40.5; Netherlands, 38.1; Belgium, 31.3; Italy 31.0; United States, 29.5; United Kingdom, 29.2; Canada, 28.9; France, 28.3; Germany, 22.0.
The dollar price level hit bottom in 1932 and 1933….
For decades economists have wrestled with the problem of what caused the deflation and depression of the 1930's. The massive literature on the subject has brought on more heat than light. One source of controversy has been whether the depression was caused by a shift of aggregate demand or a fall in the money supply. Surely the answer is both! But none of the theories—monetarist or Keynesian—would have been able to predict the fall in the money supply or aggregate demand in advance. They were rooted in short-run closed-economy models which could not pick up the gold standard effects during and after World War I. By contrast, the theory that the deflation was caused by the return to the gold standard was not only predictable, but was actually, as we have noted above, predicted.
The gold exchange standard was already on the ropes with the onset of deflation. It moved into its crisis phase with the failure, in the spring of 1931, of the Viennese Creditanstalt, the biggest bank in Central Europe, bringing into play a chain reaction that spread to Germany, where it was met by deflationary monetary policies and a reimposition of controls, and to Britain, where, on September 21, 1931, the pound was taken off gold. Several countries, however, had preceded Britain in going off gold: Australia, Brazil, Chile, New Zealand, Paraguay, Peru, Uruguay and Venezuela, while Austria, Canada, Germany and Hungary had imposed controls. A large number of other countries followed Britain off gold.
Meanwhile, the United States hung onto to the gold standard for dear life. After making much of its sensible shift to a monetary policy that sets as its goal price stability rather than maintenance of the gold standard, it reverted back to the latter at the very time it mattered most, in the early 1930's.
Instead of pumping liquidity into the system, it chose to defend the gold standard. Hard on the heels of the British departure from gold, in October 1931, the Federal Reserve raised the rediscount rate in two steps from 1_ to 3_ percent dragging the economy deeper into the mire of deflation and depression and aggravating the banking crisis. As we have seen, wholesale prices fell 35 percent between 1929 and 1933.
Monetary deflation was transformed into depression by fiscal shocks. The Smoot-Hawley tariff, which led to retaliation abroad, was the first: between 1929 and 1933 imports fell by 30 percent and, significantly, exports fell even more, by almost 40 percent. On June 6, 1932, the Democratic Congress passed, and President Herbert Hoover signed, in a fit of balanced-budget mania, one of its most ill-advised acts, the Revenue Act of 1932, a bill which provided the largest percentage tax increase ever enacted in American peacetime history. Unemployment rose to a high of 24.9 percent of the labor force in 1933, and GDP fell by 57 percent at current prices and 22 percent in real terms.
The banking crisis was now in full swing. Failures had soared from an average of about 500 per year in the 1920's, to 1,350 in 1930, 2,293 in 1931, and 1,453 in 1932. Franklin D. Roosevelt, in one of his first actions on assuming the presidency in March 1933, put an embargo on gold exports. After April 20, the dollar was allowed to float downward.
The deflation of the 1930's was the mirror image of the wartime rise in the price level that had not been reversed in the 1920-21 recession. When countries go off the gold standard, gold falls in real value and the price level in gold countries rise. When countries go onto the gold standard, gold rises in real value and the price level falls. The appreciation of gold in the 1930's was the mirror image of the depreciation of gold in World War I. The dollar price level in 1934 was the same as the dollar price level in 1914. The deflation of the 1930's has to be seen, not as a unique "crisis of capitalism,” as the Marxists were prone to say, but as a continuation of a pattern that had appeared with considerable predictability before—whenever countries shift onto or return to a monetary standard. The deflation in the 1930's has its precedents in the 1780's, the 1820's and the 1870's.
What verdict can be passed on this third of the century? One is that the Federal Reserve System was fatally guilt of inconsistency at critical times. It held onto the gold standard between 1914 and 1921 when gold had become unstable. It shifted over to a policy of price stability in the 1920's that was successful. But it shifted back to the gold standard at the worst time imaginable, when gold had again become unstable. The unfortunate fact was that the least experienced of the important central banks—the new boy on the block—had the awesome power to make or break the system by itself.
The European economies were by no means blameless in this episode. They were the countries that changed the status quo and moved onto the gold standard without weighing the consequences. They failed to heed the lessons of history—that a concerted movement off, or onto, any metallic standard brings in its wake, respectively, inflation or deflation. After a great war, in which inflation has occurred in the monetary leader and gold has become correspondingly undervalued, a return to the gold standard is only consistent with price stability if the price of gold is increased. Failing that possibility, countries would have fared better had they heeded Keynes' advice to sacrifice the benefits of fixed exchange rates under the gold standard and instead stabilize commodity prices rather than the price of gold.
Had the price of gold been raised in the late 1920's, or, alternatively, had the major central banks pursued policies of price stability instead of adhering to the gold standard, there would have been no Great Depression, no Nazi revolution and no World War II….
In April 1934, after a year of flexible exchange rates, the United States went back to gold after a devaluation of the dollar. This decreased the gold value of the dollar by 40.94 percent, raising the official price of gold 69.33 percent to $35 an ounce. How history would have been changed had President Herbert Hoover devalued the dollar, three years earlier!
France held onto its gold parity until 1936, when it devalued the franc. Two other far-reaching events occurred in that year. One was the publication of Keynes' General Theory; the other signing of the Tripartite Accord among the United States, Britain and France. One ushered in a new theory of policy management for a closed economy; the other, a precursor of the Bretton Woods agreement, established some rules for exchange rate management in the new international monetary system.
The contradiction between the two could hardly be more ironic. At a time when Keynesian policies of national economic management were becoming increasingly accepted by economists, the world economy had adopted a new fixed exchange rate system that was incompatible with those policies.
From Forbes, Nathan Lewis explains the simplicity of gold-linked currency.
On The Daily Caller, Brian Wesbury suggests current spending levels will require raising middle class taxes.
At Fox News, Steve Forbes predicts the President will sign whatever debt ceiling bill Congress passes.
On The Kudlow Report, James Pethokoukis discusses the debt ceiling:
At CNN, Stephen Moore analyzes the debt ceiling impasse.
From Forbes, Reuven Brenner cites foreign examples of how to assess the US budget deficit, and cites the need to increase entrepreneurship.
At NRO, Bob Stein suggests the sluggish economic numbers will improve later this year.
The WSJhighlights a Kauffman Foundation study on how to stimulate more new businesses:
The Kauffman Foundation proposes a "startup act" to make it easier for new companies to survive and contribute to long-term growth. One key is making ieasier to access the capital markets, at a lower cost, at early stages of business formation. Messrs. Schramm and Litan want to permanently waive any capital gains taxation for long-held investments in startups over their early years. (We prefer a zero capital gains tax on all investments, but this is a start.)
Another good idea is an unlimited annual supply of an "entrepreneurs visa" available to any immigrant who wanted to come to the U.S. to start a business, with a particular focus on newcomers with expertise in engineering, science and technology. Still another proposal is regulatory reform. To "cleanse the books of inefficient and costly rules," any regulation that took more than $100 million from the private economy would lapse automatically after a decade.
On RCM, Jeff Snyder of Atlantic Capital Management advocates a strong dollar.
Reason TV lauds monetarist Milton Friedman on the anniversary of his birthday.
On Kudlow, Brian Wesbury and Don Luskin discuss the weak economy:
On The Fiscal Times, Bruce Bartlett contrasts President Obama’s negotiation style with President Reagan’s.
From ABC’s This Week, Keynesian Paul Krugman explains his view of why the economy is weak and how spending cuts will make it worse. (Part 2, here.)
At COAL, Krugman argues most of the recent deficit surge stems from the recession:
At Economix, Clinton economist Laura D’Andrea Tyson links the fiscal deficit to the weak jobs and investment climate.
The Huffington Post, Keynesian Jared Bernstein notes the rise of wage inequality since the early 1980s.
At Forbes, Jerry Bowyer highlights China’s weaknesses.
On Cafe Hayek, Don Boudreaux rebuts China currency manipulation charges.
The XtraNormal bears argue China manipulates its currency which steals American jobs.
The WSJclarifies that China has many problems and that a burst of Reaganite growth would restore American confidence.
China remains an underdeveloped country, its economy barely one-third the size of America's. Its leaders live in fear of peasant revolts, ethnic separatists, underground religious movements, political dissidents and the free flow of information. Its economy remains profoundly hobbled by corruption, inefficient state-owned enterprises and an immature banking system.
There is no genuine rule of law and its regulatory environment has become increasingly unpredictable for foreign investors and local entrepreneurs. It suffers from an aging population and environmental damage Americans wouldn't tolerate. Its greatest comparative advantage—cheap labor—is under strain from rising domestic wages and competition from places like Vietnam and Bangladesh.
Above all, China suffers from an absence of self-correcting mechanisms, beginning at the top with its authoritarian political system. And while it can trumpet achievements like a stealth fighter or bullet trains—some based on pilfered designs—it has a harder time adjusting to failure, much less admitting to it.
From Foreign Policy, Daniel W. Drezner explains that China isn’t beating the U.S.
On The Kudlow Report, Gov. Mitch Daniels (IN) shows sound policy instincts regarding China and pro-growth policies, but omits the dollar from his analysis:
At Conscience of a Liberal, Paul Krugman praises the Bush era’s dollar decline.
On his blog, Brad DeLong quotes Krugman citing Milton Friedman in favor of currency devaluation.
In The WSJ, Joseph Sternberg suggests China won’t "rebalance" toward consumption anytime soon.
China needs to reallocate capital and labor on a massive scale to orient itself toward producing goods and services that Chinese consumers want to consume. This will require major banking changes, especially improving access to credit for the small and medium-sized enterprises that make a modern consumption-driven economy tick. Both regulation and habit will get in the way.
The regulation involves interest rates: Government manages both deposit and lending rates in a way that guarantees banks a wide spread. This was intended to help banks earn themselves out of an earlier generation of nonperforming loans at the expense of households, which earn lower rates on savings deposits. And the policy could prove especially necessary if 2009's credit binge results in huge piles of bad debts.
On Lew Rockwell, "Norm" claims Bill Kristol’s recent support for monetary reform is “another neocon trick, like supply-side economics.”
On Bloomberg, supply-side guru Robert Mundell suggests the dollar soaring against the euro in 2009 and 2010 is responsible for the weak US economy, and predicts 2011 growth at two percent. He recommends a euro floor of $1.30. He also explains China’s interest rate hikes attract increased hot money flows but does nothing to raise its exchange rate value versus the dollar.
At Gold Seek Radio, Chris Waltzek interviews Steve Forbes on gold (play button towards the bottom).
On The Kudlow Report, Kellyanne Conway debates the President’s change of economic direction:
Pro-growth advocate and former-Godfather Pizza CEO Herman Cain is considering a run for President.
Rebelyid recounts the Mundellian policy mix, and the recent deviations from it.
On The Weekly Standard, Irwin Stelzer notes the rise of interest in sound money (hat tip: Ralph Benko):
All of which explains two important developments—the rise in the price of gold, and the sweeping gains by Republicans in the congressional elections. Gold opened the year at under $1,100 per ounce and is closing it at close to $1,400 per ounce. Despite substantial slack in production capacity, inflation expectations rose, and investors became worried about the long-term value of the dollar. Indeed, some economists are talking about the end of the era of fiat money and a return to the gold standard. The Federal Reserve Board is again printing money, and promises to print more if needed. With unemployment high, and the printing presses running at a rate that just might result in inflation down the road, talk of a return to the bad old days of Jimmy Carter and stagflation, or of a double dip recession, was heard in some boardrooms.
In The WSJ, Pete DuPont proposes spending cuts, reduced regulation, and improving Obamacare as Republican priorities.
From earlier this month, Cato’s Alan Reynolds notes the US is the world’s largest manufacturer.
On NRO, Heritage’s Michael G. Franc sees a loss of faith by entrepreneurs in the federal government.
From the archive, Milton Friedman analyzes the rise of capitalism in Dickensian England on NRO.
On C-SPAN, U.S. Rep. Ron Paul (TX) discusses his agenda, including Federal Reserve oversight.
On Forbes, historian and Econoclasts author Brian Domitrovic explains that dollar instability led to Social Security’s creation.
In The WSJ, Charles W. Kadlec suggests that after four decades of evidence, the floating dollar experiment can be ruled a failure.
From 1947 through 1967, the year before the U.S. began to weasel out of its commitment to dollar-gold convertibility, unemployment averaged only 4.7% and never rose above 7%. Real growth averaged 4% a year. Low unemployment and high growth coincided with low inflation. During the 21 years ending in 1967, consumer-price inflation averaged just 1.9% a year. Interest rates, too, were low and stable—the yield on triple-A corporate bonds averaged less than 4% and never rose above 6%.
What's happened since 1971, when President Nixon formally broke the link between the dollar and gold? Higher average unemployment, slower growth, greater instability and a decline in the economy's resilience. For the period 1971 through 2009, unemployment averaged 6.2%, a full 1.5 percentage points above the 1947-67 average, and real growth rates averaged less than 3%. We have since experienced the three worst recessions since the end of World War II, with the unemployment rate averaging 8.5% in 1975, 9.7% in 1982, and above 9.5% for the past 14 months. During these 39 years in which the Fed was free to manipulate the value of the dollar, the consumer-price index rose, on average, 4.4% a year. That means that a dollar today buys only about one-sixth of the consumer goods it purchased in 1971.
Interest rates, too, have been high and highly volatile, with the yield on triple-A corporate bonds averaging more than 8% and, until 2003, never falling below 6%. High and highly volatile interest rates are symptomatic of the monetary uncertainty that has reduced the economy's ability to recover from external shocks and led directly to one financial crisis after another. During these four decades of discretionary monetary policies, the world suffered no fewer than 10 major financial crises, beginning with the oil crisis of 1973 and culminating in the financial crisis of 2008-09, and now the sovereign debt crisis and potential currency war of 2010. There were no world-wide financial crises of similar magnitude between 1947 and 1971.
Concerning quatitative easing, WSJ columnist David Wessell asks, What Would Milton Do?
On NRO, Larry Kudlow reports the Federal Reserve may be backing off its plans for aggressive easing.
At Forbes, Steve Forbes predicts new technologies will make energy plentiful for decades to come.
Also on Kudlow, Stephen Spruiell and Robert Reich debate how to cut the deficit:
At Bloomberg, Amity Schlaes relates the death tax to the story of Secretariat.
On Forbes, AEI’s Alex Brill and Chad Hill analyze tax policy’s impact on growth.
In the Cato Journal, Jude Shelton calls for a new global institution to promote currency stability.
On RCM, Louis Woodhill critiques CBO's Keynesian economic model.
At Commentary, Jennifer Rubin advocates revival of the GOP’s pro-growth wing.
But modern conservatism’s success, both in policy and electorally, did not come from being the green-eye-shade party. It stemmed from an enthusiasm and celebration of free markets and from policies that sought to unleash the potential of individuals, investors, and employers. And it was Reagan whose embrace of supply-side economics, free trade, and modest regulation unleashed an economic boom — and launched a conservative political vision that was inclusive and successful.
At Asia Times, David Goldman supports an export-led recovery.
In Forbes, John Tamny sees high government pay weakening the private sector.
At Business Insider, Gregory White explains that debt-to-revenue is more important than debt-to-GDP.
In The WSJ, Harvard's Robert Barro argues unemployment benefits contribute to high unemployment.
U.S. Rep. Paul Ryan (WI) focuses on fiscal deficits in assessing the weak economy.
Keynesian Robert Samuelson diagnoses the demand-side of the economic malaise.
The WSJreports on Japan's effort to weaken its currency:
AEI’s Kevin Hassett says Gov. Chris Christie (NJ) is popular because he has cut spending and refused to raise taxes.
Regarding the
10-Year Treasury rate
chart from yesterday's NYT, a longer-term chart makes clear today's rates are close to their pre-Great Inflation level. Also note the lag: rates stayed high well into the 1980s even though gold and CPI had fallen to low-inflation levels.
