By Ralph Benko
The New Republic, in its February 8th issue, carries an article by Danny Vinik entitled Rand Paul Has the Most Dangerous Economic Views of Any 2016 Candidate. It appears that TNR’s fact checkers decamped along with its top journalists. Vinik:
Speaking in front of more than 150 Iowa activists, Paul ripped into the Federal Reserve and promoted his “Audit the Fed” bill, which he introduced earlier this week. “I think there needs to be some sunshine,” he said, according to reports of the event. …
Paul’s bill …would significantly damage the Fed’s independence, which exists so that politicians cannot influence the central bank for their own political purposes. In other words, “Audit the Fed” would lead legislators to interfere with monetary policy matters and put the entire economy at risk.
Whether or not one supports Audit the Fed, the argument really cannot rest on the Fed’s independence. Fed independence currently is a polite fiction. As I have cited before:
As journalist Steven Solomon wrote in his indispensable exploration of the Fed, The Confidence Game: How Unelected Central Bankers Are Governing the Changed World Economy (Simon & Schuster, 1995):
“Although they strained to portray themselves as nonthreatening, nonpartisan technician-managers of the status quo, central bankers, like proverbial Supreme Court justices reading election returns, used their acute political antennae to intuit how far they could lean against the popular democratic winds. “Chairmen of the Federal Reserve,” observes ex-Citibank Chairman Walter Wriston, “have traditionally been the best politicians in Washington.”
Forbes.com contributor Dr. Norbert Michel recently published a column here relying on the rather shabby tactic of citing empirical evidence to demonstrate how dubious is the claim of Fed independence. Michel:
Here are just a few examples (with Fed Chair dates provided):
- William Martin (1951 – 1970). President Eisenhower directed his Treasury Secretary to put the “utmost pressure” on Chairman Martin to “get a greater money supply throughout the country.” When Martin refused, Eisenhower pressured him to resign or reconsider. Martin reconsidered.
- Arthur Burns (1970 – 1978). President Nixon repeatedly worked with Burns to secure easy monetary policy with the view that it would help win elections. On one of Nixon’s famous tapes, Nixon and Burns openly mocked the idea of Federal Reserve independence.
- G. William Miller (1978 – 1979). President Carter found Miller uncooperative, so he replaced him as Fed Chair (he made Miller his Treasury Secretary).
- Paul Volcker (1979 – 1984). Ronald Reagan openly cultivated a working relationship with Volcker and repeatedly asked him for tighter monetary policy. Alan Greenspan reports that, in one meeting, Reagan reminded Volcker that the Federal Reserve Act was subject to change.
- Alan Greenspan (1987 – 2006). Alan Blinder, appointed to the Fed Board by President Clinton, publicly suggested Greenspan was catering to Clinton.
- Ben Bernanke (2006 – 2014). A 2012 New York Fed publication notes: “The U.S. Treasury and the Federal Reserve System have long enjoyed a close relationship…. This relationship proved beneficial during the 2008-09 financial crisis, when the Treasury altered its cash management practices to facilitate the Fed’s dramatic expansion of credit to banks, primary dealers, and foreign central banks.”
Perhaps the Fed’s defenders have some other definition of independence in mind?
The issue of central bank independence from political meddling is a venerable one. As the New York Fed’s Liberty Street Economics eruditely notes, in a recent column anticipating Valentine’s Day:
John Keyworth, curator of the Bank of England’s museum, has provided on the Bank’s website a full explanation for why the institution is called “The Old Lady of Threadneedle Street.” It stems from an elaborate 1797 satirical cartoon created by James Gillray. The author’s words best explain what is going on in the cartoon:
“The cartoon shows the Prime Minister of the day, William Pitt the Younger, pretending to woo an old lady, the personification of the Bank, but what he is really after is the Bank’s reserves, represented by the gold coin in her pocket, and the money-chest on which she is firmly seated.”
Unsurprisingly, this action was seen by the Government’s detractors as outrageous and Sheridan, representing the Whig opposition, described the Bank as ‘an elderly lady in the City who had . . . unfortunately fallen into bad company’.
There is a certain irony. Sen. Paul might be counted as one of the great champions of protection of the Fed from abuse by the political authorities. It is very probable that Sen. Paul’s motive is to rescue the Fed from having “unfortunately fallen into bad company.” Although the Fed, the Democrats, and leftish economic commentators may dispute his chosen means they may share a common ideal: high integrity monetary policy.
Fed independence from political meddling — which I support — actually became crippled when Lyndon Johnson, in the wake of the Tet Offensive, closed the London gold pool. It died when Richard Nixon closed “the gold window” in 1971. It is after he genuflects to the shibboleth, though, that Vinik really goes off the rails:
But a Paul presidency would still have disastrous effects on the U.S. economy, for other reasons that were on wide display in Iowa on Friday night.
“Once upon a time, your dollar was as good as gold,” he said. “Then for many decades, they said your dollar was backed by the full faith and credit of government. Do you know what it’s backed by now? Used car loans, bad home loans, distressed assets and derivatives.” Paul’s comments make very little sense. When Paul asks what backs the U.S. dollar now, he’s effectively asking what makes it valuable. When the U.S. used a gold standard, it meant that a dollar was worth a certain amount of gold. Economists overwhelmingly agree that that was a terrible idea, but the connection seemed to explain why dollars had value. …
“What Paul and his followers are concerned about is the purchasing power of the dollar. They want to return the U.S. to the gold standard to ensure that inflation doesn’t undermine the actual purchasing power of the dollar. Over the long run, a gold standard would guarantee that price stability. But over the short run, prices would still fluctuate violently, as happened when the U.S. used the gold standard.
“In terms of current policy, goldbugs, as they are often called, think the Fed’s recent decisions—its zero interest rate policy and bond-buying program—will cause skyrocketing inflation and reduce what you can buy with dollars.”
There is so much just factually wrong about this that one hardly knows where to start.
Sen. Rand Paul is drawing liberal fire from many left wing commentators, now including Prof. Paul Krugman. Many of the criticisms are badly off base. As noted in yesterday’s column there is so much simply factually incorrect about The New Republic’s Danny Vinik recent Rand Paul Has the Most Dangerous Economic Views of Any 2016 Candidate — for example — that one hardly knows where to begin. So, to quote the composer John Cage, let’s “begin anywhere.”
First, Rand Paul, unlike Ron Paul, nowhere appears on record as advocating the gold standard. Implication of such advocacy to Sen. Paul is, flatly, wrong. This is sloppy journalism.
Second, whatever Sen. Paul’s views may be, the current overwhelming opposition to the gold standard by academic economists is reminiscent of nothing so much as the Wizard of Oz’s movie peroration: “I, your Wizard, per ardua ad alta, am about to embark upon a hazardous and technically unexplainable journey into the outer stratosphere…to confer, converse, and otherwise hobnob with my brother wizards.” The pronouncements of such eminent economic wizards as those sampled by the Booth School are as unpersuasive as they are rotund. In the unvarnished language of Forbes.com contributor Nathan Lewis, a leading witness to the fact that the Emperor has no clothes, “Academic economists of every variety, along with high-fashion architects, are now generally regarded as deluded nincompoops….”
Third, it is irrelevant and downright misleading to observe that the gold bugs have been (as indeed many of them have been for 40 years) prognosticating skyrocketing inflation. This misleads by collapsing the distinction between the primary advocates of the gold standard by such public intellectuals as Steve Forbes and Lewis E. Lehrman (with whose Institute I once had a professional relationship) and academics such as Prof. Lawrence White and Prof. Brian Domitrovic, among many others … with the views of the gold bugs. These represent two entirely separate ideological camps.
It betrays deep ignorance to conflate them. Responsible opponents of the gold standard really should come to grips with the fact that few, if any, of the leading advocates of, or sympathizers with, the gold standard have been prognosticating inflation, skyrocketing or otherwise. The (extensively) stated leading concerns of gold standard proponents have been historically anemic growth rates and median family wage stagnation — both of which are in evidence — rather than incipient hyperinflation.
An empirical review published in 2011 by the Bank of England — not exactly a “fever swamp” — of the performance of the fiduciary currency standard relative to the performance of the Bretton Woods gold-exchange standard and the classical gold standard, found, as then summarized by Forbes.com contributor Charles Kadlec:
- Economic growth is a full percentage point slower, with an average annual increase in real per-capita GDP of only 1.8%
- World inflation of 4.8% a year is 1.5 percentage point higher;
- Downturns for the median countries have more than tripled to 13% of the total period;
- The number of banking crises per year has soared to 2.6 per year, compared to only one every ten years under Bretton Woods;
- The number of currency crises has increased to 3.7 per year from 1.7 per year;
- Current account deficits have nearly tripled to 2.2% of world GDP from only 0.8% of GDP under Bretton Woods.
The concerns raised are well grounded and a far cry from the straw man ones presented by Vinik.
Vinik shows his hand — as a fabulist, not a journalist — in his final paragraph.
Of course, the Republican Party itself has an incredibly misguided position on monetary policy. In 2012, its platform included returning to the gold standard. That’s a good reason why just about any Republican nominee would be a dangerous president. But Paul is far more open about his disdain for the Fed, and given his ideological bent, he’s far less likely to listen to conservative economists who reject his monetary policy views. At least on the economy, that makes Rand Paul by far the most dangerous candidate in the 2016 field.
“[J]ust about any Republican nominee would be a dangerous president”?
Hello Democratic National Committee, send this man a box of fine Cuban cigars!
Vinik, had he taken a moment actually to read the GOP 2012 platform, would have discovered that nowhere in its platform is there a call for a return to the gold standard … or even the mention of the gold standard (except as a metaphor for the quality of care for wounded warriors). It contains, rather, a call for a “commission to investigate possible ways to set a fixed value for the dollar.”
Vinik by no means is the only commentator to go into hyperbolic meltdown over Rand Paul. Nobel Prize economics laureate Paul Krugman, recently, in Money Makes Crazy:
Right now, the most obvious manifestation of money madness is Senator Rand Paul’s “Audit the Fed” campaign. Mr. Paul likes to warn that the Fed’s efforts to bolster the economy may lead to hyperinflation; he loves talking about the wheelbarrows of cash that people carted around in Weimar Germany.
Prof. Krugman, a polemicist, characteristically exaggerates. Mr. Paul “likes to warn?” The record demonstrates two brief statements of concern, made in obscure venues, by Dr. Paul. If there are any more they must be obiter dicta in venues even more obscure, showing these “likes” to be far less than a leitmotif of Paul’s rhetoric, much less agenda.
Krugman goes on to indict the Republicans as “monetary crazy” — based mostly on a few stray comments and some utterly irrelevant, outlying, positions such as one derived from Ayn Rand. Few of the positions he cites are any part of the real discourse now ongoing among the center right. Krugman studiously ignores intelligent concerns stated by the Honorable Paul Volcker, the Honorable Jeb Hensarling, the Honorable Scott Garrett, and the Honorable Kevin Brady, among others, as well as scholarly publications by Heritage Foundation, Cato Institute, Atlas Foundation, and other center-right policy institutes (such as American Principles in Action, which I professionally advise).
Prof. Krugman and Danny Vinik thus present themselves as exhibits in support of the observation of Sen. Nelson Aldrich, head of the National Monetary Commission, before the New York Economics Club in 1909, “[T]he study of monetary questions is one of the leading causes of insanity” … (which the erudite Krugman’s headline, Money Makes Crazy, echoes).
Krugman is right about one thing, though: “Monetary policy … should be” a major issue in the 2016 campaign. And Danny Vinik, despite his errors, is right about one thing. Rand Paul might well be “by far the most dangerous candidate in the 2016 field” — though for the the progressive central planning agenda, not for the economy.
Liberal fire is a badge of honor. Liberal fire will be an asset, should he choose to run, in the presidential primaries. Rand Paul draws liberal fire.
Republished with permission of Forbes.com