Bruce Bartlett Flubs His Gold Standard Non-Argument

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The recent announcement that the Republican Party would explore commodity-defined money through a repeat of the '81-‘82 Gold Commission was welcome news. Figure the Party's modern credibility largely remains a function of Ronald Reagan, and while Reagan was most known for his tax cutting prowess, quite unlike modern Republicans who can't seem to move beyond taxes, Reagan understood that "No great nation in history has survived fiat money, money that did not have precious metal backing."

Reagan's remark about paper money came after years of dollar debasement in the Nixon/Carter 1970s, and not surprisingly the new/old change in GOP policy comes after 11 years of dollar debasement under George W. Bush and Barack Obama. Gold always tells the tale in that its price doesn't so much move; rather the dollar in which it's priced moves. Gold rose in dollar terms in the ‘70s precisely because the dollar weakened, and since 2001 a falling dollar has once again revealed itself through a rising gold price. And then just as it did in the ‘70s when the dollar collapsed, the price of oil has spiked.

Looked at more optimistically, the pain wrought by the monetary disaster that was the ‘70s gave us the aforementioned Gold Commission, along with the relative monetary calm of the Reagan/Clinton ‘80s and ‘90s when the economy boomed. And then a near monetary repeat (the CPI disparity is a function of the feds measuring that which doesn't expose the monetary error) of the ‘70s under Bush and Obama has predictably led to a renewed call for stable money. Somewhat ironically, the once great Bruce Bartlett has sided with monetary chaos. Having milked his role in the ‘70s revival of classical economics for all that he could, Bartlett now runs in more statist circles; cashing in on his reputation as a "former Reaganite who saw the light."

In a blog post for the New York Times this week, Bartlett poured cold water on the idea of a return to gold. And in an embarrassing policy equivalent of Hollywood's "Do you know who I am" line, Bartlett backed his near fact-free argument with "Economists today generally believe..."

Bartlett's anti-gold stance is somewhat ironic considering what he wrote in his excellent book, Reaganomics, in 1981. In it he pointed to inflation as one factor in the collapse of IPOs in the 1970s. Bartlett observed that during periods of inflation "profits are not real", thus making investment in tomorrow's innovators a more risky bet. What a shame inflation isn't measured the same way now as it was in the ‘70s, though it's fair to assume it wouldn't matter to the easily flattered Bartlett for whom bouquets from the left are like oxygen for normal people.

Back to the main thrust of his anti-gold argument, Bartlett in chalkboard scratching fashion writes that "Economists today generally believe that the gold standard exacerbated the Great Depression." Let's think about that one for a moment.

"Economists generally believe" lots of things, including the horrifyingly obtuse falsehood that World War II ended the Great Depression.  Though even the mildly sentient among us understand that human capital is the driver of all economic advancement, the economics profession labors under a "general" presumption that the best way for an economy to grow is through legalized erasure of human capital thanks to countries being at war.

Underlying the aforementioned lie is the belief that the best way to stimulate economic activity is for opposing countries to erect barriers to trade wrought by armed conflict, have their military forces exterminate one another, kill potential customers for their respective commercial sectors through indiscriminate bombing, and generally destroy wealth rather than engage in wealth enhancing exchange. Applying this illogic on a more local basis, the U.S. could outlaw recessions simply by dynamiting an American city each time unemployment bubbles up, and then employ an army of the formerly jobless to rebuild that which was leveled.

"Economists generally believe" WWII ended the Great Depression because economists generally are Keynesians who naively feel that governments can stimulate economic activity through heavy spending. Of course the problem here is that governments can only spend and "create jobs" to the extent that they're able to extract spending power from the productive private sector first. In short, WWII didn't end the Great Depression, rather the economy wrecking New Deal, after failing miserably, ended for the most part in the late ‘30s such that the U.S. economy started growing again, and with that growth the federal government was able to tax real production enough to fund our military's efforts in WWII.  First came the private economic growth, then the government spending paid for by actual growth that economists strangely cite as the driver.  Put very simply, the "economists" that Bartlett cites frequently get things backwards, mistake cause and effect, put the cart before the horse, or all three.

As for money's role in the Great Depression, the problem for Bartlett there is that FDR devalued the dollar in the early ‘30s, yet the Great Depression lasted until the late ‘30s. Even more problematic for Bartlett - and for Keynesians more broadly - is that after the war the free world returned to a gold standard, and the U.S. in particular slashed spending. Looked at in light of what "Economists generally believe", the alleged double whammy of a return to gold-defined money in concert with massive spending cuts should have foisted on the U.S. the mother of all Great Depressions, but it did not contrary to the "general" views of economists in 1945. 

Taking what "Economists generally believe" even further, Bartlett largely owes his living today to a professional past that had him part of the supply-side economics movement. Of course Bartlett knows very well that back in the '70s and ‘80s, "Economists generally" believed supply-side economics to be worse than a joke.

Happily for us all, so discredited were "economists" by the ‘70s and ‘80s that voters and politicians ignored them in favor of simple logic which says that economic growth improves when barriers to production are removed. Understood then, even by Bartlett as evidenced by Reaganomics, was that unstable, cheap money was a signficant barrier to growth. Needless to say, the scoreboard that is the stock market voted in favor of an economic idea that "Economists generally" scoffed at.

Taking Bartlett's argument further, he writes that "A survey of a panel of prominent economists earlier this year by the University of Chicago business school found no support for the gold standard, including by those who had served in Republican administrations, including Edward P. Lazear of Stanford and Richard Schmalanzee of the Massachusetts Institute of Technology." Once again, going back to the ‘70s and ‘80s, no doubt lots of economic panels "found no support" for supply-side economics, and those panels were proven wrong. After that, Bartlett writes with a forked pen. Figure he sparked a second career for himself with a book that attacked George W. Bush's economic policies, yet to support his anti-gold argument he's reduced himself to citing architects (Lazear) of the Bush economic disaster.

And then to close what is a very weak case against gold, Bartlett cites a Berkeley professor who says that the Fed, "if on a gold standard, would have to engineer deflation to hold the nominal gold price constant." Wrong again.

Indeed, the point of a gold defined dollar is precisely to avoid the "deflation" that the professor describes. In particular, assuming major global instability such that there's a rush to dollars that drives down the price of gold, this would signal to the Fed a need for more dollars in the system in order to keep the nominal price of gold constant. Far from a driver of deflation or inflation, a gold price rule would force the monetary authority to adjust the supply of dollars to any and all instances of global distress.

So while Bartlett argues without evidence that gold-defined money would increase financial instability, the purpose of a return to gold is to reduce just that. Financial crises have gone up, not down, since 1971, as has the frequency and duration of recessions, oil spikes, reduced GDP growth, etc. Other than revealing to those who desire a return to stable money values what a weak hand the advocates of monetary chaos have, Bartlett proved nothing with his witless argument.

 

John Tamny is editor of RealClearMarkets, Political Economy editor at Forbes, a Senior Fellow in Economics at Reason Foundation, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). He's the author of Who Needs the Fed?: What Taylor Swift, Uber and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank (Encounter Books, 2016), along with Popular Economics: What the Rolling Stones, Downton Abbey, and LeBron James Can Teach You About Economics (Regnery, 2015). 

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