Reaganomics vs. Keynesianism: Not an either-or choice

"Reaganomics is dead; long live Keynesianism." That's the supposed outcome of the straw-man false dilemma our politicians and media have been touting since the Obama budget was proposed. And the Keynesians are winning that false debate, hands down. 

The problem is, that debate isn't about economics at all; rather, it's a carefully-disguised political agenda hiding behind a facade of economics. The dead giveaway is when we hear that the "failed policies of the past" are rightfully being swept into the dustbin of history by the economics of government regulatory wisdom and people-friendly benevolence. Spare me.

The false dilemma

"Do you want Keynesianism, or Reaganomics? Take your pick."

The political message crafters are telling us we did exactly that, on November 4, 2008 — and Keynesianism won by a landslide: 365 electoral votes to 173. That's the explanation given by any Democrat who's been justifying the Obama-Pelosi economic proposals. We've been hearing it from Democrats on the talk shows ad nauseam. Treasury Secretary Tim Geithner even used it as a non-answer to a question in his Congressional testimony last week.

The problem I have with the smug "365 electoral vote" answer is that it's an evasion. We need economic answers to the economics questions, not political answers. The campaign is over; it's time to start leading, and stop spending so much time solidifying one's voter base.

So, there's a big void that's begging to be filled with some real answers. The false dilemma of Reaganomics-or-Keynesianism shouldn't be allowed to slide by unchallenged. That's why I thought it was time to step in, and offer a better explanation that we're getting from our politicians and lapdog journalists.

Electoral votes
Before we abandon the entertaining but misleading topic of electoral votes, let's take it a step or two further. Let's compare the electoral votes won by Reaganomics versus Keynesianism, for the relevant elections closest to their original implementations here in the USA.

The result: Reaganomics beats Keynesianism.  Here are the tallies...

Electoral votes for Keynesianism
1932: 472 of 531
1936: 523 of 531
1940: 449 of 531
average: 481.3 of 531 = 90.6%

[1944: 432 of 531, excluded; that election was more about war than economics.]

Electoral votes for Reaganomics
1980: 489 of 538
1984: 525 of 538
average: 507.0 of 538 = 94.2%

Reaganomics wins one for the Gipper. The Geithner response turns out to be not only an evasive non-answer, it's also an embarrassing boomerang.

Okay, now let's get a little more serious. Let's look beyond the political blather by examining the actual economic reasons underlying Keynesianism and Reaganomics. When we do that, we see that it's not the either-or choice our politicians would have us believe. Both theories have a right time and a right place.

"Stop-the-bleeding" economics

Keynesian economics was mainly a theory about how to stop an economy from imploding.

John Maynard Keynes himself had little to no reason to analyze the best way to grow an economy that was already humming along. Reason: The target economy for his theory, far from humming along, was nosediving towards permanent poverty-for-most. [That's why he didn't "waste time" digging into the aggregate supply function; he simply assumed it was fixed, which makes the aggregate demand function the only cause of changes in the employment level. That's why today's Keynesians talk of almost nothing but "aggregate demand," how to stimulate it, etc.; they just assume, as Keynes did, that aggregate supply can be ignored.]

Keynesian economics is about stopping the bleeding by giving the government a big role in getting the economy moving again — because if the bleeding isn't stopped, the end result could have dire implications for the entire society. Keynesianism rejects the "government-can't-help" philosophy by calling for a high level of government interference in a slack economy. Keynesianism understands that, in crisis conditions, the evolutionary process of free markets can work too slowly to prevent an economic collapse; it therefore entrusts top-down, "intelligent design" economics to achieve a return to stability.

"Invent-the-future" economics

Reaganomics on the other hand (based largely on the principles articulated by Friedrich Hayek), was a set of principles and policies designed to improve the standard of living at a faster noninflationary pace. Its presumed setting is an economy that is stable (not nosediving). Even a slightly faster rate of improvement compounds into large differences in the standard of living that would be enjoyed by future generations.

Reaganomics rejects the "government-knows-best" philosophy, by trusting entrepreneurs, competition, and the order-from-chaos principle. In essence, Reaganomics trusts the bottom-up evolutionary process of selection and adaptation, fostered by competition among suppliers for winning the consumers' loyalties. Under Reaganomics, government provides the basics: defense, justice, education, infrastructure, and a stable currency. Private sector workers, entrepreneurs, managers, and businesses provide the growing prosperity.

So, it's not an either-or choice. There's a time for stop-the-bleeding economics, and a time for invent-the-future economics. Too bad we aren't hearing any of that from our political-agenda-driven leaders.

Anyway, that's the economics part of the story. As I've said a million times before: politics trumps economics. So now it's time to flush out the hidden political agendas, so we can become better-equipped to stop them from getting in the way of good economics.

The chart below shows what I think is the ideal scenario. First, we stop the bleeding, and avoid an economic and political collapse. After returning to stability and implementing some new economic safeguards based on what we've learned, we shift to a new, invent-the-future mode.

Notice the yellow question mark: that's the point of return to stability. If we reach that point, the economics of stop-the-bleeding will have succeeded.

The bad news: I'm almost certain that Nancy Pelosi and her crowd have no intention of backing away from the high-interference programs they are going to implement this year; I think she and her crowd have virtually zero desire to help the employers who make the economy tick, or to motivate the entrepreneurs who invent new jobs and help the economy grow.

The good news: For weeks, President Obama has promised, time and again, that his stop-the-bleeding bill was "temporary stimulus." Temporary, by definition, doesn't last too long. Although I seriously doubt that Obama understands what an "entrepreneur" is, he's a smart guy and a fast learner; he'll have some time — while "temporary" plays out — to learn before it's too late. I bet Nobel winner Edmund Phelps might be willing to help get the president up to speed, if Obama would just ask him; Phelps knows all about the effect entrepreneurs have on job-creation and growth.

Was Obama serious about his promise of "temporary"stimulus? I hope so, but then again, he naively handed responsibility for the bill over to Speaker Pelosi, who seized the opportunity to make it the repository for the last 30 years' worth of the Democrats' government-knows-best agenda.

In any case, the measure that will tell the tale: government spending as a percentage of the economy (...or maybe as a percentage of the 2008 economy, to prevent a shrinking denominator from distorting the ratio). If it doesn't drop back to the recent-history range after the economy stabilizes, Pelosi's hidden political agenda will have defeated the promise President Obama made to the nation when he sold the bill. Let's hope it does drop back. And let's hope President Obama uses the next year or two to look into what motivates employers and entrepreneurs.

-----------------------------

One of the misfortunes of the law [is that] ideas become encysted in phrases and thereafter for a long time cease to provide further analysis.
—Oliver Wendell Holmes, Jr.

Comments

[Bob]

I agree that there is a time and place for everything. I also agree that now is not the time to let things sort themselves out. Lastly, I'm still willing to give this new administration the benefit of the doubt....for a while.

However, it's time to strike a recurring phrase from the mouth(s) of this new team (and that includes the Prez.). It goes something like this:

" You know, we inherited a trillion dollar deficit and this crisis."

Please. This is like a new CEO coming into GM and telling everybody he didn't mess it up.

So, to the Treasury Secretary, Chairman of Economic Advisors and all the other players, tell us something we don't already know. I don't care what you inherited. You are here to make it better and if you can't you will be gone in four years. Quite honestly, if we're hearing the same song two years from now the last two years of your administration may be quite rough.

[goy]

Hi Steve - while I think the fundamentals of your thesis have merit, they're predicated on the notion that we're in a situation that actually requires (or, more accurately, -required-) Keynesian government "stimulus" AND which was caused by a natural failure of the markets.

But the truth is quite different. Regardless who's to 'blame' (there's plenty to go around - notably more to one side than the other), we're experiencing a *manufactured* crisis (i.e., the gutting of the credit markets - which miraculously peaked at precisely the instant when it would do Obama the most good). That crisis is overlayed upon an otherwise unremarkable ebb in GDP (which in turn was primarily caused by Fed rate manipulation when they should have left well enough alone). The manufactured crisis is absolutely taking a negative toll on the economy, but almost solely due to three things: the incompetent manner in which TARP was implemented (i.e., throw money at ALL banks, regardless of their soundness), federal policies that have further damaged healthy credit institutions' ability to lend, and Obama's incessant sky-is-falling rhetoric intended to terrify the public into approving his wealth redistribution policies.

Bair's recent oxymoronic statements further erode lending ability by creating an atmosphere where people are disinclined to make the critical deposits required for credit to flow. Indeed I'm sure many folks are withdrawing cash as I type this. The result? Billion$ more in Keynesian 'stimulus' required to keep up with bank failures caused by government incompetence.

Thus at every stage we see that government incompetence - not the market - is at the root of the failing economy. Obama's administration, so far, has epitomized that incompetence in every way that matters - from the fraud through which he amassed his campaign war chest, to lying/flipflopping on his agenda and campaign promises, to a rogue's gallery of failed cabinet appointments, to his recent unveiling of plans to destroy coal and nuclear energy markets. There is absolutely NOTHING this man has done to warrant any confidence whatsoever, let alone the benefit of the doubt. The fact is this: there IS no doubt. Some of us predicted this very outcome based on the fact that the man has never held a position of executive responsibility in his entire life. QED.

Obama has the most left-leaning record of any U.S. Senator. Knowing that alone, I respectfully submit that if you believe the fake 'conflict' between Obama and Pelosi is anything more than puppet theater, and if you don't believe that he is in complete agreement with her "hidden" (????) agenda, then you have simply not availed yourself of what exists out there regarding Obama's past allegiances, alliances and activities. He has pushed for "redistributive", "reparative" reform for years, lamenting the fact that the Constitution doesn't say enough about what government is supposed to provide for us. He has coddled and consorted with marxist radicals like Bill Ayers, Mike Klonsky and Frank Marshall Davis all his life. His activities on behalf of ACORN through efforts to "enforce" CRA via litigation exacerbated the banking/credit crisis. His goal has never, ever been in doubt: level the economic playing field so that all outcomes are (ostensibly) equal, regardless of an individual's efforts.

Given his history, pretending Obama was serious about his promise is as self-delusional as was believing GHWB's "read my lips" nonsense.

[beancounter]

Well, there is some evidence that Obama admires Reaganomics:

"Ronald Reagan changed the trajectory of America in a way that Richard Nixon did not, and a way that Bill Clinton did not," Obama argued at the start of last year's Democratic primaries."

http://www.cnn.com/2009/POLITICS/02/24/analysis.obama.reagan/index.html

P.S. I can't figure out if you're a troll Mr. goy, hyper-partisan or simply don't understand politics. I'll be gracious and assume the last. True, he was the most left-leaning Senator in 2007, but that means nothing to anybody who understands politics: rankings in years which he is not in pre-campaign mode matter, and certainly issues such as abortion and gay marriage don't matter a whit in economics. I also point you out to a post earlier in this blog where a Senator outlines how the Western world came hours away from collapse. The crisis certainly is manufactured, but by crooks, not the Democratic party.

[William Woody]

I've seen other people suggest this false dilemma as well. Thanks for writing a response that makes sense.

[goy]

- I can't figure out if you're a troll...

Rule #5 won't help you here. Neither will any of the "gracious" *cough* deflection you chose to pursue.

Oh, and by quoting BHO's Reagan reference out of context, you've conveniently overlooked the fact that he emphasized Reagan's style, while ignoring the substance of what Reagan believed and what he accomplished. BHO makes a habit of this - talking the talk of other successful executives to boost his own empty, telepromptered image, while demonstrating that he is incapable of walking the walk.

[Marty Watkins]

Thanks Steve for the history review and insight my history and econ professor's did not provide.

Due to the paradox of thrift we need a very irrational spender to keep things from imploding. The government is the only entity able to be so rationally irrational.

Hopefully after governments "irrational" behavior works, government will have the wisdom to back away and allow capitalism to be the miracle that it has been and will be.

[samiran]

Steve,

Perhaps I've been reading too far into the propaganda. I'll be the first to admit that the vantage point you sit at tends to color the data you get.

However; I have not seen any positive arguments regarding the structure of the stimulus. Strictly, I understand the potential macroeconomic concepts you outline as "stopping-the-bleeding". In broad, broad terms, this is the dropping money out of helicopters.

That being said, how does the stimulus plan do this? According to what I've read much of this money will be doled out slowly.

Here are some links:
http://www.cnsnews.com/Public/Content/Article.aspx?rsrcid=43708
http://gregmankiw.blogspot.com/2009/01/cbo-on-fiscal-policy-lags.html
http://www.cbo.gov/ftpdocs/99xx/doc9968/hr1.pdf

The CBO report is the last link.

As far as I read it, if you include *all* sources of spending (so not just 'infrastructure stimulus', but ever penny spent by the stimulus), the government will have injected $169.5 billion by the end of 2009, and $525.5 billion by the end of 2010 (and additional $356 billion).

Frankly, isn't this a very crappy attempt at Keynesian-style stimulus?

For $525 billion, you could knock out 100% of all corporate taxes this year, with $200 billion left over for 'infrastructure' stimulus (more than the stimulus bill even spends in 2009!). Even assuming that corporations would use 20-30% of that to improve their debt position, it strikes me that this would be a better way to stimulate aggregate demand, by simultaneously pumping up corporate spending power (in a *temporary* way suited to capital goods purchase), while dumping a big pile of money ($200 billion; more than the obama plan!) on infrastructure.

What am I missing here? Do you really think that the Obama Stimulus plan has a chance at working, given that it really is so small in the first 18 months?

I think you really are giving too much benefit of the doubt without questioning the mechanics of his proposals.

$787 in Keynesian Stimulus sounds like a fine idea during a serious financial crises, but it really *does* matter how the money is spent, and even more than how, it *really* *really* *really* *does* matter *when* the money is spent.

Maybe I'm too much of a recalcitrant libertarian, but I just don't see how this long-term stimulus plan is superior to tax cuts; even with the upward-trending savings rate (4% now? trending to 10% or so?) Give the consumer $10, and he'll reliably spend $8, even during the current crises.

Put $10 in H.R. 1, the American Recovery and Reinvestment Act of 2009, and Uncle Sam spends $2 this year, $4.36 in 2010, $2 in 2011, and the remaining $1.36 between 2012-2015.

Am I miss reading the plan? Do I not get it? Because otherwise, I just don't see how your pro-Obama Stimulus arguments are coherent?

I'd like to repeat that I think you are correct; and that stimulus of some form would be proper and helpful. And I'm certainly not arguing with your positions on deficits not mattering (I'm in 100% agreement).

But the Obama Stimulus? It *isn't* going to work! It's not fast enough!

[samiran]

I'd like to make a point on my math! $525 billion breaks down as $339 billion (estimated corporate tax receipts for 2009 from the Tax Policy Center), and $186 remaining for 2009 stimulus.

Total price tag is $525 billion; I wasn't talking about $525b+200b, but $525b total.

[beancounter]

Mr. goy, politics *is* style. If I admire someone I certainly do not admire him simply for style and none of his substance. Nevermind that the quote is certainly *not* out of context because in the very next sentence (the context) he mentions entrepreneurs, dynamism and entrepreneurial spirit.

I "deflect" because this is an economics blog and rebuttal of your partisan accusations has been done to death elsewhere -- but you know that. What does Ayers, ACORN and so on have to do with economics? By the way, Joe the Plumber was a Republican plant, and BHO certainly is not a Marxist as you imply. Colin Powell was right when he said all government is a form of wealth redistribution. It was a trap, to lure people like you into believing BHO was a Marxist and you bought it whole.

But I don't really need to continue any further. A true independent would understand that all politicians break campaign promises, all politicians take advantage of any available funding and all politicians have skeletons in their closet. A true independent certainly wouldn't find anything to get angry at Obama, even if he didn't support Obama, especially so early in his term. Politics as usual? Perhaps, but certainly nothing to get worked up about unless you're a political neophyte.

If you don't want to be marked as a partisan perhaps you should take a stance like Steve's wait and see.

[goy]

- ... politics *is* style.

No. Propaganda is style. Political leadership is style backed up by substance. BHO possesses exactly none of the latter, and never will. And of course I clearly noted that *you* quoted out of context, not BHO.

Economics doesn't happen in a vacuum, bc. It drives and is driven by ideological factors. You deflect because those factors and their association with the current state of the economy are difficult for you to comprehend or accept. Possibly both. They are nonetheless significant, and simply dismissing them based on this site's context is intellectually dishonest in the extreme.

And btw - it's hardly partisan to note that BHO's ideological underpinnings, and the allegiances, associations and actions he's pursued all his life are anathema to the Republican Form of Government guaranteed to each State by the U.S. Constitution. It's not partisan to note that his policies are, and always have been, diametrically opposed to individual liberty: that condition which is only fully supported by the absolute preservation of private property, not wealth distribution, and the economics of capitalism, not socialism.

[beancounter]

You see an ideological war between private and public, Marxism and Capitalism, big government and small government. Let me tell you something -- your kind of thinking is dead, exactly the kind of false dilemma this blog post rails against. An independent non-brainwashed drone would give credit to Obama at the minimum for Gates and his attempt to appoint a Republican to Commerce Secretary. An independent would also give credit to Obama for assembling his cabinet rapidly in response to crisis and chalk his blown appointments to speed rather than incompetence, especially since the blown appointments were largely for the reasons you champion against -- too complicated tax code. But you giving Obama zero credit is what marks you as a partisan.

From your "absolute preservation of private property" comment I can only surmise you are an anarcho-capitalist who sees income tax as unconstitutional or less constitutional and an intolerable infringement of personal liberty. All I have to say is you are free not to use roads, hospitals, airports, police or any of the other services offered by government paid for through violation of private property and can even move out of America if you so desire.

Ironically people like you are far closer to Marxists than those you label liberals or "socialist." An ideal Marxist is stateless, destruction of the state apparatus. The *smallest* government. It may be unsettling for you to know that the only difference between you and a Marxist is you understand human nature a little better -- you realize that a communal warehouse would never work because everybody would always take more than their quota -- but both you and a Marxist believe in an ideal state with minimal or no power (it is the reason many anarchists are Marxists.)

[timwalsh300]

Samiran,

I think you committed the grave error of mistaking fiscal stimulus for creating money. Nothing is being "injected." Nothing is being "dropped out of helicopters." Congress and the President don't even have the power to do that if they wanted to. Every dollar spent on fiscal stimulus is offset by a dollar collected through taxes or borrowing. All the stimulus does is put our savings (the Treasury notes that we are buying) to work.

[samiran]

timwalsh300,

I think that is primarily semantics in the context of the argument I am making. Of course, I would argue with you on this statement, "Every dollar spent on fiscal stimulus is offset by a dollar collected through taxes or borrowing."

In a floating faith 'n credit backed currency, $1 most definitely does not equal $1. That's true on face; a dollar placed into a bank may free up $10 worth of credit, while a $10 million contract for a failing, but public road construction company may create $50 million in paper stock wealth. There are multipliers at every level of the system. This occurs at the federal level in many ways, including projections of future outlays and unappropriated priorities.

Beyond that, there is plenty being "injected", mainly in the form of backstops and loan guarantees by the Fed. Even those these aren't actual dollars, they have a great deal of value, and the potential to become real money, at some level. It is unclear when, and under what circumstances that may happen.

That all being said, and irrelevant of whether or not it is true, it has little to do with my argument. In a nutshell, this is the that Obama stimulus creates an additional $1 trillion dollar obligation on the federal government over the next five years. This is "savings put to work", but unless this recession goes on for 2-3 years most of the money will not be "put to work" until after the recession ends.

What's the logic in that? Where is the "stimulus" effect? And why aren't supply side effects, albeit with a small multiplier, more effective at jolting the economy and nation-wide confidence?

As I see it, we can spend $700-800 trillion in the next 12 months in order to stimulate demand, or we can dramatically cut taxes to free up additional private purchasing power.

It seems to me, however, that the stimulus plan, as implemented, is neither of these two options.

[Jim Glass]

Just for the record, Keynes himeself, never ever recommended deficit spending to counter an economic slump.

In 1937, when unemployment was 11% in Britain, much higher than we have today, he publicly *opposed* deficit spending "stimulus".

Keynes did believe that more government spending might be needed to stabilize an economy -- but be believed such spending should be long-term and fully financed with taxes, not a short-term "stimulus" that was deficit financed.

"Keynesian deficict spending" was innovated in his name by his followers. (Some might invoke "the law of diminishing disciples" here -- regarding some of whom in FDR's Administration Keynes famously commented "I am not a Keynesian".)

[beancounter]

simiran,

Your argument would be far more convincing before the TARP.

Now it is not a question of 20-30% of bailout money held. It could be 100%. If you give a one year corporate tax break, corporations could hold onto the money for further mergers, just like banks. Certainly if I were in charge of an HR department, a one year tax break would not create any sort of long term positions. I might temp out some work, but then again I might not. Or corporations might hold onto the money as a reserve, just like banks.

Gaging whether the Obama stimulus works will be a massive controversy for years to come. Conservatives and libertarians are already declaring it a failure, while liberals are already declaring it a resounding success. I only know this -- the only justification for a stimulus is to prevent the collapse of the economy as a whole. So as long as a great stock market crash or the default of the US Government doesn't happen, I will be halfway convinced that the Obama stimulus and his other plans have worked. No doubt that will make libertarians roll their eyes, but given they believe in the destruction of Federal government institutions such as the Fed as their reason d'etre, their criticism of the stimulus is moot. They also don't believe a collapse is possible in the first place. The other half will come from numbers such as GDP and unemployment (unlike Steve I do not particularly care if 23% over 22% of GDP is spent by government -- government interference entails far more than simply more spending but regulation, and I do not see why spending alone should be considered government interference but that is an ideological difference -- crowding out -- for another time).

[STS]

Reagan vs. Keynes is a false choice for two additional reasons (at least):

1. Reagan's fiscal policy WAS 'Keynesian' (remember those big deficits?). He didn't think of himself as a Keynesian because of the ideological fixations he shared with his advisors and key financial backers. But military spending has appreciable value as stimulus even if it doesn't have the very highest multiplier.

2. The real question isn't the absolute size of government so much as WHAT government DOES. Some government spending is always more or less dumb or ill-advised. Other government spending is always needed. The question that any serious observer will want to address is "what is the proper role of government in the economy." Simply shouting about MORE or LESS government spending strikes me as the characteristic reaction of a crank. (Usually somebody eager to spend someone else's tax dollars or someone who just wrote a painfully large check to the IRS -- neither is taking a particularly considered view of the problem.)

[Rich Johnson]

Similar to other comments on this post, let's say that the economy comes out of the recession or improves drastically a year to a year and a half from now. Only a small percentage of stimulus money will have been spent. Investors who are currently holding on to their money may tire of waiting and look for opportunities thus freeing up private sources of capital. If this happens, should the congress and president repeal some of the planned (but not spent) stimulus spending (especially that which is not to take effect for awhile)? If we are to assume that production remains level and demand falls creating an economic downturn, it follows that production will diminish as workers are laid off, investment money and credit becomes scarce, etc. When demand picks up there must be a lag in production of some sort to return to previous levels, no? Is it more costly to start up again?

If that should be the case, the speed of stimulus should be high on the priority list. Short of throwing money from helicopters it seems that tax holidays or tax breaks (even some with time limits) provide money in the quickest manner possible to all entities -- consumers, businesses, banks, investors. That will require deficit spending to maintain government at current levels but let the real drivers of the economy make the decisions on the allocation of resources and capital (consumers, businesses, banks and investors).

Not entirely unrelated, I just read this article on National Review talking about the dollar as the Final Money world currency and its effect on the economy. I'd love your comments on the article Steve if you are so inclined. http://article.nationalreview.com/?q=Y2U0MzU0NTY3YmNiNjVmZTZkMzQyOWFkOTliZmUzMzU=

[Optimist123]

Rich,

I read the article; although I agree that the dollar is the world's reserve currency, I disagree with several of the conclusions.

Think of the dollar as "fiat gold." Just like when the dollar is backed by real gold, too much of it is inflationary, not enough of it is deflationary. There are several differences between a fiat-gold dollar and real-gold dollar; here are three important ones in my judgment:

1. In a downturn, central bankers can dampen or stop the deflationary trap by creating more fiat-gold at a much faster pace than gold mine owners can create more real gold. The Great Depression was largely a result of central bankers allowing 10% deflation (and skyrocketing unemployment) to continue for two or three consecutive years without doing anything to stop it. Milton Friedman blamed that horrible mistake on the untimely death of Benjamin Strong (of the NY Fed) and the subsequent shift of power to the inept Washington Board of Governors.

2. When inflation threatens, the Fed can react quickly by selling its T-securities back to the private sector, thereby taking money (and credit-expansion potential) out of the economy. (The author talks as if inflation is inevitable, as if selling securities isn't even an option for the Fed.)

3. Whether it's fiat money or gold-backed money, we are depending on a group of men and women to supply just enough of it, but not more than enough, to support our economy's growing potential to produce real goods and services. In the case of fiat money, that group is the federally-appointed group of US citizens comprising the Fed board of governors. In the case of gold-backed money, that group includes the gold mine owners in Russia, South Africa, and Indonesia. To which group would I rather entrust control of our money supply? I hope the answer is obvious.

[Joe C.]

This is no longer theory. I think we're missing the big picture: One worked the other didn't. One turned a 2-year recession into a 10-year depression, the other turned a 10-year recession into the greatest peacetime economic expansion in 2 years.

[Rich Johnson]

Steve,

Thanks for taking time to read the article and for the comments. I didn't find it as an argument for the gold standard. I saw it more as stating the fact the the US Dollar is the world's money standard. It also showed the advantages and disadvantages to that. We have an unusual advantage in that we can print more money and it effects other currencies tied to the dollar whereas others can inflate their currency with little or no effect to ours. Consequently, when other countries have economic woes it doesn't effect us generally but quite the opposite is true when we have economic problems.

I spent 10 months in Afghanistan in 2004-2005 and was always dumbfounded that I could find someone to convert U.S. currency to Afghanis (Afghan currency) in the most remote places. The dollar is king!

[beancounter]

Joe C.,

Nobody's missing the big picture, except perhaps you. The Great Depression started in 1929 and the New Deal didn't happen until 1933-1934. Blaming the New Deal is half honest at best. The big picture is WWII was a massive spending program. Saying spending can't get us out of tough times is half honest too.

And half honest is being extremely charitable. According to USBEA:

Year GDP (Billions)
1929 103.9
1930 91.2
1931 76.5
1932 58.7
1933 56.4
1934 66.0
1935 73.3
1936 83.8
1937 91.9
1938 86.1
1939 92.2

Same inversely for unemployment, trending down after New Deal with the exception of FY1938, coinciding with an attempt to prematurely balance the budget before full recovery.

Now I am well aware of what libertarians say, that the New Deal suppressed growth and full recovery would have happened in 1935. But anyone not blinded by ideology looking at the numbers might conclude New Deal worked to a degree, and certainly would not conclude New Deal prolonged the depression since the standard deviation between 1929 and 1933 is enormous. Reagan is insufficient to disprove New Deal, because its entirely possible *both* New Deal and Reaganomics worked.

[Higgs Boson]

"To which group would I rather entrust control of our money supply? I hope the answer is obvious."

History has repeatedly shown that governments will print money for political expediancy, e.g., to finance war, until the currency becomes worthless. This has never happened and cannot happen with gold. So yes, Steve, the answer is obvious.

"the standard deviation between 1929 and 1933 is enormous"

The difference between two data points is not a standard deviation.

[Optimist123]

Higgs:

I had a hunch your vote would be with the foreigners.

Also: History has shown that *politicians* will print money for political expediency. That's why Hamilton strongly advocated a central bank independent of Congress. That's what we have now.

Also: True or false: Under the gold standard, the deflation trap was never a problem, nor was inflation (even after major gold discoveries).

[beancounter]

That's a misrepresentation Mr. Boson. I certainly did not take 1929 and subtract 1933. I took 1929, 1930, 1931, 1932, 1933 and when speaking of a subset of a set the meaning is certainly clear when one speaks of "between" one element and another. Bottom out at 1933 coinciding with the beginning of the New Deal, clear increase in GDP while New Deal was in effect. Let's remember the US did not fully enter the war until 1941.

Nixon terminated Bretton Woods in 1971, years after the Vietnam War. So no, war mongering is not a result of "loose" fiscal policy and has certainly happened before. The Roman Empire diluted the Aureus. Ask any reasonable person and they will consider these gold standards, but perhaps libertarians consider only their fantasy gold standard as the bona fide. Kind of like how new age communists deny the Soviet Union was a true representation of communism, a no true scotsman.

[Higgs Boson]

You are right, Steve. I am on the side of the foreigners, especially the Muslim Jihadists, especially the Muslim Jhihadist wife-beating puppy-killers. Now you know.

We have a Central Bank. It is not independent. (True or False: The seven Board of Governors are appointed by the President and approved by the Senate.)

Hamilton advocated a Central Bank; Jefferson opposed it. That doesn't prove who was right, only who won out.

I understand the arguments against a gold standard, but I reject the assumptions underlying those arguments. Fiat money is neither the only monetary system possible, nor the best one, but governments prefer it because they can debase the currency for their own purposes.

I am an average guy and believe my views closely mirror the majority of the American people. We see the incestuous relation between the banking and finance industries and government, and suspect the bailouts are for their benefit, not ours. We are taxed to death, the money disappearing into a black hole. We are paid for our labor in a currency that steadily depreciates. It is appalling that we have, in the land of the free, the highest per capita prison population on Earth. We cannot afford healthcare, yet we spend more on defense than the next forty five countries combined. The Patriot Act, warrantless wire-tapping, torture, endless war, it goes on and on -- truly an Orwellian world.

Yes, I've heard all the statist rationalizations. I don't believe them. No one believes anything the government says. But not to worry, Steve. Barring total economic collapse, the shaky status quo will be maintained, and the whole rotten corrupt enterprise can stumble along until the next crisis.

[Optimist123]

"I understand the arguments against a gold standard, but I reject the assumptions underlying those arguments."

Similarly, I understand the arguments for a gold standard, but I reject the assertions that it eliminates inflation, does not stifle real growth, exacerbate panics, cause deflation, bank failures, rapid money supply expansions or contractions, or accelerating unemployment -- and especially that it does not deepen deflationary troughs that threaten not just economic collapse, but violent political collapse as well.

Christina Romer's brand new paper, "Lessons from the Great Depression for Economic Recovery in 2009," reminds us of several important conditions back then, including the effects of the gold standard (...hint: it wasn't the steady, stable, panacea gold bugs keep dreaming about).

Excerpt: "Part of the explanation for why the Federal Reserve did so little to counter the financial panics and decline was that it was fighting to defend the gold standard and maintain the prevailing fixed exchange rate." Then, she reminds us, FDR temporarily suspended it, let the dollar depreciate, and brought it back at a much higher price (dollars per ounce). That in turn caused large quantities of gold to flow to the US from Europe, exacerbating political and economic tensions there -- and enabled the *US Treasury* (not the Fed) to rapidly increase the money supply. (Link to paper: http://tinyurl.com/bxb3ts )

If only the 1930s gold mine owners could have goosed their production on a moment's notice, it might have prevented poltical turmoil in Europe, Fed impotence here, and such a deep depression that lasted such a long time. But they couldn't, so it was every country for itself.

Higgs, I know you love the idea of gold, so this debate is at a standoff. Personally, I love the glitter of gold, I love owning a gold coin or two, I like the smile it puts on the faces people receiving jewelry made of the stuff. But I loathe the thought of gold backing our nation's money supply; it is a threat to real wealth creation, as well as economic and political stability.

In short, I am an advocate for enhancing real economic growth in a stable, well-defended, socio-political-economic system; the gold standard would be an impediment to that. And that is about the extent of the energy I want to direct against monetary policy thinking stuck in the nineteenth century. We have what could be a bright future ahead of us -- as long as we don't fall for the false glitter of the gold standard, or several other impediments to real growth.

[Jim Glass]

"libertarians consider only their fantasy gold standard as the bona fide"

As Milton Friedman pointed out, there is nothing "libertarian" about a gold standard.

It is nothing short of international (or domestic) governmental price fixing of currency, and it produces all the problems that price fixing always produces. This is one of the reasons why Friedman opposed gold standards, both international and domestic.

Self-styled libertarians who fancy the gold standard as "libertarian" are naively mistaken. It is governmental manipulation as much as any other price fixing.
~~~
"History has repeatedly shown that governments will print money for political expediancy, e.g., to finance war, until the currency becomes worthless. This has never happened and cannot happen with gold."

Kidding, right? On both claims? Ancient Rome had a gold standard and was almost as famous for its inflation as its wars. Debasing currency and coin clipping are ancient gold standard practices.

Moreover, whenever it becomes inconvenient, governments *always* go off the gold standard. See US Civil War, Napoleonic Wars, take your pick. The absolute peak of the gold standard was 1914 -- did it do anything at all to stop World War I ?

It never stopped a war yet.

[beancounter]

I cannot speak for Mr. Boson or for libertarians in general. However, if inflation was my overriding concern, over foreign control, GDP growth, unemployment, and god knows what else, I would come to the inevitable conclusion that with any medium of exchange, someone, somewhere would have the power to print money. I suppose the Mr. Bosons say that private banks printing deposit certificates for gold would never debase their currency for fear of going out of business, but given individuals accept inflation now I find the argument that they would not accept inflation from private sources to be unconvincing and a complete hypothetical.

So, again continuing with the premise that I thought inflation was the greatest threat to a stable economy, I would conclude that *any* monetary instrument was unacceptable.

Barter.

Businesses and individuals exchanging goods would simply sign promissory notes with full legal force. But instead of money, they would be exchangeable for a service or good. Monetary instruments would be eliminated, indeed outlawed, and payroll would be in the form of promissory notes for services in massive clearing houses which would have their own promissory notes and so on. Counterfeiting barter notes would fail, as each business would keep their own double entry accounting records. Only a barter economy could satisfy my extreme urge to avoid *no one* having the ability to print legal tender.

There, I've satisfied my imagined urge to utterly annihilate inflation. Perhaps the Mr. Bosons of the world should be truer to their goals and stump for a barter economy. At least then it would be clear they place containing inflation as a higher priority than economic growth.

[Higgs Boson]

You guys have convinced me. Seriously. I figured a gold-backed currency would be less open to manipulation and abuse, but as Jim and bean correctly pointed out, there is no monetary system that government cannot destroy.

If our rulers can blow off the constitution, they certainly aren't going to be bound by some stupid gold standard.

On the other hand, bean's description of a private clearing house of promissory notes sounds pretty good. Alas, our rulers would never allow it either.