In an important piece in today's Wall Street Journal, Lew Lehrman explains the connection between monetary and fiscal policy—fiscal policy will almost inevitably tend toward deficits and debt if the monetary authorities are (virtually) unconstrained in financing that debt. Until it all comes crashing down—as it is now about to. And he suggests a solution:
The solution to the problem is equally simple. First, in order to limit Fed discretion, the dollar must be made convertible to a weight unit of gold by congressional statute—at a price that preserves the level of nominal wages in order to avoid the threat of deflation. Second, the government must at the same time be prohibited from financing its deficit at the Fed or in the banks—both at home or abroad. Third, only in the free market for true savings—undisguised by inflationary new Federal Reserve money and banking system credit—will interest rates signal to voters the consequences of growing federal government deficits.
Lehrman's broadening of the budget debate is consistent with my attempt on Fox News Sunday to say that the GOP presidential candidate in 2012 needs to present a broad economic critique of, and alternative to, the Obama-Bernanke-Geithner economic model, not just a slightly faster path to deficit reduction or a slightly different view on tax rates. Fiscal, tax, budgetary, monetary, and regulatory policy all have been—to one degree or another, and for a shorter or longer period—on the wrong track, and their parallel wrong tracks are part of a broader liberal-welfare-state misunderstanding of sound political economy.
The GOP is going to nominate someone who articulates a critique of our present path. It would be better to have a candidate with a bold and comprehensive critique, and a grasp of sound political economy, than a candidate who simply wants to tinker—or one who goes off the rails in pursuit of populist approbation or gimmicky proposals.