Mitt Romney has articulated the choice we will make in November. We can choose President Obama and a European future—i.e., high unemployment, demographic winter, big government commanding over 50 percent of future output, a welfare state engineered and manipulated by the Washington bureaucracy, the end of American leadership, and, ultimately, national insolvency. Or we can embark once again on the road to rapid economic expansion, through pro-growth tax reform, smaller government, a balanced budget, and sound money. What we need, Romney argues, is an entrepreneurial economy based on the free price mechanism, free markets, free and fair international trade. For Romney the goal of rapid economic growth is full employment, a strong national defense, and a rising American standard of living. These policies are necessary. But are they sufficient?
Romney’s analysis emphasizes the character of presidential leadership, the need for hands-on White House direction of national economic policy. Workable economic policies require not only the right goals but also a strong president capable of leading Congress and the nation in a new direction—away from Obama’s backward-looking statism, and forward to pro-growth tax policies, budgetary equilibrium, and sound monetary policies. Regulations must be radically simplified. The tax code must be comprehensively reformed—with a larger base, fewer loopholes, and lower rates.
In his 2010 book Seeds of Destruction, Glenn Hubbard, a top economic adviser to Romney, summarizes the entrepreneurial spirit underlying Romney’s approach. “First and foremost, it will mean putting unemployed Americans back to work. Second, it will mean stabilizing the housing market and housing prices. Third, it will mean increasing the productivity of the American worker and making U.S. industry more competitive in international markets so that wage and economic growth can once again boost purchasing power. Fourth, it will mean reducing America’s dependence on increasingly expensive oil. Finally, it will mean creating a strong and stable dollar so that our import bill remains manageable.”
On this last point, Romney has criticized the Greenspan-Bernanke Fed—the ultimate cause of the stock market bubble of the 1990s and the subsequent crash and recession (2000-2002); the ultimate cause also of the real estate bubble, its collapse, and the Great Recession (2007-2009). Romney argues in almost every economic speech that Obama’s stimulus policies are poorly planned and ineffective, and that Obama has been AWOL on major legislation, defaulting to a pork barrel Democratic congressional majority on economic and health care policy in 2009-2010, when he had a majority in both the Senate and the House.
In private and public comments, Romney and Hubbard have suggested that hyper-expansive Fed policy and quantitative easing—repressing interest rates to zero—is a reckless monetary approach that in the past has led to bouts of inflation, followed by deflation and recession.
I embrace much of this analysis and many of Romney’s proposals. His program is necessary, but it may not be sufficient.
Romney often cites GDP numbers. In the textbook equation, gross domestic product equals consumption plus government spending plus business investment plus (or minus) net exports. Citing GDP numbers implies this is the best way to measure national wealth and prosperity. But if net exports are negative and business investment is declining, while government spending and consumption are growing very rapidly, nominal GDP can still be positive, even as national wealth is declining. The GDP equation is one-dimensional accounting; it omits the balance sheet—assets minus liabilities—which tracks the true increase or decrease in the wealth of nations, firms, and families. Recall that GDP was growing in 2007, but because of exponential increases of debt fueled by the Fed, the bubble and net national wealth were about to collapse.
As an analogy, consider an American car company (pre-2007). Its sales (or top-line income) may have been going up, but its real profits were declining. The car company continued to build new factories, hired more people, created new dealers. But its net worth had been running down for years—heading toward zero. Ultimately, bankruptcy or a bailout had to be the result.
How did the car company show rising top-line income, or sales (analogous to GDP), while its wealth was collapsing? The answer is by borrowing from banks and bondholders everywhere and whenever it could, at home and abroad—mortgaging its assets and dissipating the wealth accumulated for generations—until, finally, it became insolvent. This is the European path now followed by the Obama government and several of our state governments. There is a better path, as Governor Scott Walker of Wisconsin has shown.
The United States stored up immense human and financial capital for centuries. But that wealth has now been substantially mortgaged to the Fed and foreign monetary authorities, commercial banks, government trust funds, domestic institutions, and increasingly to foreign lenders. Still more ominous, private national wealth, owned by American taxpayers, has been indirectly pledged as collateral for U.S. government debt and its enormous unfunded liabilities—among others, Medicare, -Medicaid, and government pensions. Unless there is a dramatic change in U.S. economic policy, national insolvency will ultimately overtake us. It is difficult to predict when. But in the long run, what cannot be sustained will not be sustained. European insolvency is the witness to this truth.
Romney and his advisers must analyze the true state of our national balance sheet in addition to our problematic national income accounts. They should offer a National Balance Sheet to the public, in accessible language. It will show America’s dire and deteriorating position as a massive debtor, largely propped up by the exorbitant privilege of the dollar’s role as a global reserve currency. Despite a solvent private sector, U.S. government budget deficits and balance of payments deficits, financed by the Fed and foreigners, increasingly compromise the American balance sheet.
Romney’s tax reform is pro-growth, but it tends to emphasize tax rate reductions for property income. It would be useful to emphasize that a pro-growth tax reform should not favor property income (e.g., capital gains and dividends) over labor income (wages and salaries). Cutting rates for both was the key to the bipartisan Reagan tax reform. The Reagan reform was also good politics. The vast majority of Americans, after all, are salary and wage earners.
Romney speaks clearly, even passionately, on monetary policy, sometimes indicting the hyperactive credit creation (or money printing) of the Greenspan-Bernanke Fed. He has recommended a rule-based monetary policy in place of the present unrestrained, discretionary (indeed, arbitrary) Fed policy.
The question is—which rule? The Taylor rule? Nominal GDP targeting? Inflation targeting? Money stock targeting? Men in the mold of Paul Volcker would help, Romney suggests. But this is a recommendation for different people instead of rule-based institutional reform of the Federal Reserve.
As Allan Meltzer’s magisterial two-volume history of the Fed shows, the 100-year legacy of the Federal Reserve System is a cycle of boom and bust, substantially caused by erratic Fed monetary policy—e.g., the 1920s boom, followed by financial collapse and the Great Depression; the 1990s stock market boom, crash, and recession; the real estate boom, financial collapse, and the Great Recession (2007-2009). These examples characterize the Fed’s century-long, unstable reign over the dollar and manipulation of the money supply. Worse yet, under the Fed’s arbitrary policies, the purchasing power of the dollar has declined 85 percent since 1971, when President Nixon terminated the last weak link of the dollar to gold. The depreciation of the value of the dollar has gradually impoverished those on fixed incomes and those on lagging wages and salaries. It is fair to say the Federal Reserve has presided over an age of inflation.
To carry out true monetary reform, Romney might consider other periods of American monetary history, instead of suggesting the uncertain device of more prudent Fed chairmen, or an easily manipulated Taylor rule, or an even more easily manipulated “inflation targeting rule” or nominal GDP rule.
In 1987, Romney’s economic adviser Glenn Hubbard, in a scholarly analysis of the classical gold standard (1879-1914), reviewed the performance of a period when the dollar was defined as a weight unit of gold; a period when the paper dollar was by law convertible to gold; a period when the dollar was neither an official reserve currency nor a floating monetary token in a turbulent sea of floating exchange rates. That period achieved an economic growth record the equal of any in American history. In stark contrast to the period 1971-2012, the purchasing power of the gold-backed dollar was almost exactly the same in 1914 as it was in 1879. The general price level wound up in 1914 the same as in 1879. There were variations in the price level from year to year, but over the full period, there was neither inflation nor deflation. During this period, the monetary standard of the United States—the dollar defined in law as a weight of gold—performed its constitutional role as a stable means of exchange, a stable unit of account, and a stable store of value.
According to its founding legislation—led by the experienced gold Democrat Carter Glass—the Federal Reserve Act of 1913 was designed to reinforce the existing gold standard. The Federal Reserve System was not designed to manipulate a floating paper dollar and, at its discretion, print money to subsidize the banking cartel and the budget deficit.
So, which rule should it be for monetary policy? The proven, impartial, constitutional, rule-based monetary system is the rule of dollar convertibility to gold—that is, a dollar defined in law as a weight unit of gold. No one knows better than the very practical Governor Romney that past monetary policy, tax policy, and national income accounting—and their consequences—must be studied in the only real and practical laboratory available, the economic history of American business.
Such a study shows the true (or classical) gold standard to be the least imperfect monetary system in American history.
Lewis E. Lehrman is chairman of the Lehrman Institute.