Yes, I know about the famous JS Mill quotation. But when I was younger I thought the right had a lot of intellectual momentum. The world was moving away from statism and toward neoliberalism, and it seemed like conservatives had most of the good economic ideas.
Of course there has always been a anti-intellectual strain to populist conservatism, as when the right romanticizes the “Golden Age” of the 1950s, before all those evil liberation movements of the 60s gave rights to blacks, women, and gays. But at least on economics I used to think of conservatives as being relatively hard-headed. So what is one to make of this appalling column in Forbes magazine:
Amid the very reasonable handwringing about the Fed’s charitably naive attempts to stimulate the economy through “quantitative easing”, there’s an understandable drive among some Fed critics to severely reduce its mandate. Specifically, the Fed can’t create jobs as its defenders inside and outside the central bank presume, so better it would be limit its role to that of inflation watchdog.
All that is fine on its face, but in seeking to redefine the Fed’s doings, naysayers have happened upon the false notion of “price stability.” A recent editorial argued in favor of repealing the Fed’s dual mandate so that it can concentrate “on the single task of stable prices”, and then politicians such as Reps. Paul Ryan and Mike Pence have similarly called for price stability in working to redefine the activities of the world’s foremost central bank.
Sadly, handing the alleged wise men at the Fed control over prices is every bit as mistaken as allowing the central bank to manage unemployment.
Indeed, it is through prices that the market economy is organized. In that certain sense, prices rise and fall with great regularity as consumers tell producers what they want less and more of. Assuming the Fed could do what it cannot; as in fine tune economic activity on the way to stable prices, we would be much worse off if Bernanke et al were to actually succeed.
To see why, it has to be remembered that the cure for high prices is in fact high prices. Or better yet, high prices foretell low prices.
If producers create a consumer product that fulfills unmet needs on the way to high prices, the latter is the signal to other producers to enter the market for the same good on the way to lowering its cost. Gyrating prices are the necessary market signal telling businesses what we need.
Taking this further, if price stability were policy, it would still be the case that a phone call from Houston to Dallas would cost $15 for a half hour of conversation. It would similarly mean that we’d be paying thousands of dollars for flat-screen televisions, not to mention even more for computers that perform very few functions.
I’m not going to insult my readers’ intelligence by describing what’s wrong with the last paragraph. If you don’t know, go read someone elses blog. At first I thought this might be an innocent slip up. Nobody’s perfect. Editors are very busy people, they can’t spot all mistakes. But the rest of the piece is equally bewildering:
In that case, rather than price stability, the sole goal of monetary policy should be dollar-price stability. Fed officials would credibly argue that the latter is the preserve of the U.S. Treasury, and they would have a point. Be it Treasury, or Treasury working with the Fed, the mandate should be in favor of stabilizing the dollar’s value.
Um, isn’t the entire point of price stability (which I don’t favor, BTW) stabilizing the value of the dollar? Indeed isn’t true that, by definition, a stable value of money means a stable purchasing power? Not to John Tamny. He seems to define a stable value of money as a stable price of gold. Why gold? Why not a stable price of bricks, or toothpicks, or zinc? He doesn’t say. Nor does he seem to have the slightest intellectual curiosity about periods in history when the dollar price of gold was stable, like 1929-33, when we had severe deflation (which provided falling prices of electronic goods like radios!), and 25% unemployment, and so discredited capitalism that we elected exactly the sort of politician that Forbes magazine would despise.
Oddly enough, Marx once again had the answer there. Marx, much like the classical economic thinkers of his era, knew that for money values to be stable, they would have to be defined in terms of gold. Marx referred to gold as “money, par excellence.”
Looked at through the prism of today, the dollar lacks a golden anchor, and the result is a money illusion that distorts the real price of everything. Worse, with consumer prices sticky in concert with commodity prices that are most sensitive to dollar-price movements, the beneficiaries of the money illusion tend to be the hard, unproductive assets of yesterday (think housing, art, rare stamps, and oil) that are least vulnerable to currency weakness, and which in fact do best when the unit of account is devalued.
Well if Marx says money must be good as gold, who am I to argue? Reading this column I can’t help but wonder why all this talk about currency depreciation is occurring when inflation is at the lowest point of my lifetime, indeed lower than during 1896-1914, the so-called Golden Age of the gold standard.
The answer to all of this is very basic. Price stability is a utopian concept on its best day that would hamper innovation on the way to reduced living standards.
The greater, more obvious answer is dollar price stability of the gold kind that would allow investors to rate ideas on their actual merits, as opposed to how they’ll perform amid dollar policy since 2001 that has erred in an economically crippling way in favor of weakness. Fix the dollar, and you fix the U.S. economy. Simple as that.
Isn’t that wonderful! No need to worry about messy real world issues like macroeconomics. No need to worry about how nominal shocks can have devastating real effects. Gold is like a magic wand that will fix the US economy. But there is one huge flaw with this argument; there are two types of gold standards, and neither produces anything like satisfactory macroeconomic outcomes:
1. One type is a managed standard, such as we had in the US between 1879-33, and in a weaker form under Bretton Woods. In that standard the nominal price of gold is fixed (just as Tamny wants) but its real value is highly unstable, as the economy would often suffer from deflation. The most devastating example was 1929-33. It’s true that the supply of gold rises at a fairly steady rate, but central bank real demand for gold was highly unstable, and thus the price level was unstable. Of course you could argue that the central banks should have done a better job of stabilizing gold demand, but by that logic why not just have fiat money and then have them do a better job of stabilizing monetary policy. Even worse, if we returned to the gold standard almost no other country would be nutty enough to follow. In that case when people in places like China and India hoarded gold out of fear of inflation, America would suffer deflation. And from history we know that deflation in America would lead to fears of devaluation, which would cause gold hoarding in America as well, and even more deflation. Tamny doesn’t even think about those issues, but why should he when he considers deflation to be a good thing?
2. Some have advocated a laissez-faire gold standard. In this case the government simply pegs the price of gold, but doesn’t hold large stocks of gold. This would be even worse than a managed standard, as the relative price of gold would then be determined exactly as the relative price of any other metal is determined, by “industrial demand.” Rapid economic growth in Asia has been boosting the relative prices of other metals such as silver, copper and iron. If gold was just an industrial commodity, then its relative price would also be quite volatile.
So either way the gold standard offers no advantages. At best, a highly managed international gold standard might lead to rough price stability. But if central banks were really able to manage gold that well, they’d also be able to mange fiat money.
I suppose I am wasting my time with this post. If the right now believes that deflation doesn’t matter, that 1929-33 is like some bad dream that never really happened, then nothing I say will make any difference.
HT: Bruce Bartlett
Leave a Reply