Book Review: George Melloan's Excellent 'Free People, Free Markets'
It was sometime during the spring of 1988 that I first read the Wall Street Journal’s editorial page. It's been a daily habit since, and in my possession to this day is the first op-ed I ever clipped from “the only editorial page that sells newspapers.” It was penned by John Bunzel, and it addressed some of the unintended consequences of affirmative action.
As it has for many, the Journal’s editorial page has had a profound impact on my understanding of economics and public policy. A daily combination of insights from some of the world’s greatest thinkers, and the launching-pad for tomorrow’s greatest thinkers, the Journal’s editorial page doesn’t just sell newspapers. What’s on the page plainly influences the domestic and global policy discussion, and often shapes the legislation that springs from ideas frequently introduced to a broad audience on the page.
That’s why it was so exciting to purchase George Melloan’s Free People, Free Markets: How the Wall Street Journal Opinion Pages Shaped America. Melloan is the retired deputy editorial page editor at the Wall Street Journal, and Free People, Free Markets (from here on the title will be shrunk to Free People) is his history of an editorial page that truly helped shape America, and realistically much more than the United States.
Melloan is on a bit of a roll. The author of many books, the one that came before Free People offered a new look at the Great Depression. When the New Deal Came to Town was Melloan’s personal account of life in small-town Indiana in the 1930s. My view is that it was one of the most important books of 2016, and any year for that matter. It was crucial for many reasons; most crucial because Melloan unmasked the Great Depression as less than Great.
While his 1930s retelling in no way hides from the mindless policy errors that gave us the slow-growth decade, he reminds readers that the American version of “recession” or “depression” is rather gold-plated. In Melloan’s unassuming and very Midwest small town, life went on. Paraphrasing Melloan, people worked, made love, sang, danced. Melloan recalls a drugstore owner flying to San Francisco and back because he could, an older brother being paid $50 to drive a car out to Los Angeles where demand for them was particularly high, and then to show that Americans perhaps didn’t realize it was the "Great Depression" until they were later told it was, Melloan writes that “Ain’t We Got Fun” was one of the big musical hits of a period that history books have reduced to desperation.
In offering a different look at the 1930s, Melloan reminded readers that policy matters, but also about how lucky we are to be American. No matter the barriers to production erected, Americans will always produce to fulfill their gargantuan needs. They did just that in the 1930s. And since When the New Deal Came to Town was released amid the endless controversy that was Election 2016, his book was a reminder that Americans would survive – and thrive – no matter the individual elected president. This was relevant at the time given all the hysteria on both sides about what would happen to the United States if he or she won. Melloan’s optimistic book signaled that Americans would figure things out and prosper no matter what.
Interesting about Free People is that if U.S. politicians had followed the Wall Street Journal editorial page’s lead in the 1930s, there would have been no downturn, no recession, and no “Great Depression.” While most modern readers associate the editorial page with great thinkers like Melloan, Robert Bartley, Paul Gigot, Holman Jenkins and Mary O’Grady (among many others), Melloan’s history is a reminder that the editorial page’s free market roots go back over one hundred years. Indeed, as Melloan notes early on, the editorial page’s free market approach “in some sense reflects[s] the personality of Charles Dow,” founder of the Wall Street Journal.
So with the editorial page’s free-market roots well in mind, let’s consider some of the causes of the 1930s downturn. The tax that is government spending surged. It’s a tax because every dollar spent by the federal government speaks to an extra dollar of federal control over the economy. That’s why the editorial page expressed so much skepticism in the 1930s. Melloan writes that it regularly attacked the Keynesian spending theory with a basic question: “How is it economically ‘stimulative’ when the government takes money from one person, the taxpayer, and gives it to another?” Notable here is that in addition to the suffocation of spending, the American worker suffered rising tax penalties levied on income. The top tax rate alone surged from 25 to 83 percent.
Regarding the dollar, in 1933, and in almost literally his first act in office, FDR shrank the greenback’s value from 1/20th of a gold ounce to 1/35th. This sent a signal to the investors without which there’s no economic progress that investment in the 1930s would be extra perilous. About devaluation, young editorialist (later Managing Editor) Barney Kilgore observed that it “wreaks havoc with the economic order.” Of course it does. That which floats and has an uncertain value shrinks the trade and investment that power economic growth.
On the subject of trade, the editorial page was strongly in favor of it. Figure that a desire to exchange is the driver of all the work we do. Yet the Hoover administration imposed a massive tax on our work through the imposition of the Hawley-Smoot tariff. As Melloan puts it, the misguided legislation “brought about a virtual shutdown in world trade,” and in slowing exchange, naturally laid a wet blanket on an economy that gained its amazing strength from global cooperation among the world’s producers. More on this in a bit.
Perhaps most important of all, the great Kilgore wrote a piece in which “he quoted a ‘shrewd observer’ in Cleveland as saying ‘If the administration really wants to plan a recovery all it has to do is quit planning.’” Yes indeed. More than most on the left or right would like to admit, the “Great Depression” was an effect of planning; of the federal government fighting what should have been a short recession. Missed by the Hoover and Roosevelt administrations was the basic truth that recessions are the cure, for them cleansing all the labor mismatches, bad habits developed, bad investments, and lousy businesses. For politicians to “fight” recessions is for them to fight recovery.
Not only was the Journal editorial page good on policy, it plainly had the philosophy right. And it wasn’t just Barney Kilgore.
Editorial page editor (1958-1971) Vermont Royster never fell for what nostalgists and economic nationalists to this day fall for; the popular notion that the past was better than the present. As Royster put it, “There is much to be said about the nineteenth century, but who, really, would want to take the world back to it?” Donald Trump could have learned a lot from Royster.
On the idea of government itself, Royster crucially observed that “Nothing is so corrupting to a man as to believe it his duty to save mankind from men.” Too often forgotten is that people in government are just people; fallible in all ways, and perhaps more fallible given their choice of a profession that’s defined by bureaucracy that suffocates individual initiative.
On whether the Soviet Union would ever match the U.S. or catch up to the west, Royster responded “never in your lifetime or mine.” Dollar devaluation? Royster asked “What more cruel to those who must live on social security, a pension, an insurance policy or a lifetime’s savings?”
All of the above is relevant for it revealing the giant shoulders on which Melloan, Robert Bartley and others stood when they took over the editorial page in the 1970s. They had learned from wise people who well understood that light government spending, light taxes, free trade and good money were the main drivers of productivity.
Their essential understanding of money helps explain why Melloan and Bartley almost uniquely saw the 1970s “oil spikes” for what they were: evidence of a “sinking dollar.” Melloan happily dismisses the notion of “oil shocks” just as the late Bartley did in his wondrous 1992 book, The Seven Fat Years. He contends that the silly concept was rooted in “the implausible theory that the Arabs had somehow, overnight, acquired an enormous market power they had not before.” The one light complaint about all this is that Melloan didn’t spend more time debunking the modern belief that oil became scarce in the 2000s, similarly out of nowhere. No, the dollar sank once again. So while Melloan discusses the dollar’s decline later in the book, he might have enunciated the previous truth by pointing out that we’re only aware of “fracking” insofar as a weak dollar made it economic, all to the economy’s detriment. Oil only soars stateside insofar as the dollar is cheap, and that's why the U.S. "energy booms" of the 70s and 2000s coincided with limp economic growth.
Notable is that the dollar’s strength and stability loomed large in what was ahead for Bartley and Melloan, along with an editorial page that would most certainly help shape history. While the Journal’s editorialists sadly did not form policy in the 1930s, they made up for it in the 1970s to the betterment of the 1980s and beyond. Basically the classical, or “supply side” revolution was given flight and major ink by the Wall Street Journal’s editorial page through its regular feature of economists and policymakers who favored reductions in the barriers to production: taxes, regulation, tariffs, and unstable money. The mistakes of the 1970s and 1930s were corrected, with the Journal’s Melloan, Bartley, and Jude Wanniski playing featured roles in the economic transformation.
Interesting about all this is that while the left then and now painted the supply-side movement as driven by and for the rich, that wasn’t the case at the Journal. Melloan informs readers that “Bob’s father taught veterinary medicine at Iowa State, I grew up in a farm village in Indiana, the son of a failed farmer, and Jude was the son of a coal miner and grandson of an ardent communist.” Melloan’s broad argument was that “supply-side measures were not meant to help the rich, but to foster the work effort and investment of time and money by people who want to become rich, or at least richer.”
Melloan knew intimately what today’s Republicans apparently do not: economic growth is an effect of the enterprising being matched with capital. Plain and simple. Evidence that today’s Republicans don’t really understand supply-side economics is that their mis-described "tax-reform" plan still penalizes wealth creation through nosebleed tax rates levied on those with the most unconsumed wealth to invest (yes, the rich), plus it doesn’t bring down the capital gains tax despite the latter existing as a penalty placed on investment success. Melloan happily writes that when “Keynesianism finally began to totter on its weak foundations, we on the Wall Street Journal’s editorial page were there to give it a good push.” Sadly, today’s Republicans seem unwittingly eager to bring Keynesianism back. Needless to say, public policy would be much better if members of Congress were to read Free People along with Bartley’s The Seven Fat Years.
An understanding of Melloan and Bartley by the New Guard is important given Melloan’s excited 1997 proclamation to Bartley that “we’ve won!” Melloan had just returned from a speech given by newly installed British prime minister Tony Blair that they could have been printed “as a Wall Street Journal editorial.” Notable here is that it wasn’t just Blair implicitly admitting that the ideas of Melloan and other free thinkers were correct. Figure that Bill Clinton’s presidency was another broad admission that Reagan was right, plus even Barack Obama didn’t dare try to bring tax rates back to the 70 percent level that prevailed in the 1970s. Melloan et al won, but it’s important for those who at least instinctually agree with him to keep on winning. Free People provides a roadmap.
Were there disagreements? A few. Melloan is aware of my belief that there’s no such thing as “easy credit” from the Fed. This rates mention given his contention that the rush into housing was an effect of low rates at the central bank, plus Fannie, Freddie, etc. The problem with this theory as Melloan doubtless knows is that housing boomed globally in the 2000s, and in countries where central bank rates were much higher, and where there was no Fannie and Freddie. Figure that England abolished its mortgage interest deduction in the 80s, yet housing soared there. It’s notoriously difficult to secure a home loan in Canada, yet housing boomed there. All that, plus housing raged stateside in the 1970s despite the Fed aggressively raising its rate target throughout the decade.
As for the aftermath of the slow growth rush into housing that eventually led to bailouts, Melloan lightly argues that the editorial page’s support of the interventions “looks sound with the benefit of hindsight.” This subject would be an interesting one to discuss with the author in consideration of a crucial point he makes earlier in the book about how “Markets are like Mother Nature, not to be messed with.” Amen. Lest we forget, 2008 marked the fifth time Citibank alone had been saved by the federal government. How could that have been good for the economy, or better yet, how could it look good in hindsight? The U.S. is the richest country in the world not because all of its businesses survive and thrive, but because most underperform and are allowed to quickly die. Our economy’s strength is an effect of allowing Mother Nature to work her magic such that the businesses that are wasting precious capital aren’t allowed to do so for long. Always. In that very real sense the bailouts were the crisis for them messing with what was healthy, and with what wouldn’t have been very earth-shaking absent the horrid uncertainty of government intervention.
Lastly, I'll continue to try to convince Melloan that the Fed was an innocent bystander in the 1930s. The Fed’s legal role back then was to act as lender-of-last resort to solvent banks, as opposed to bailing out the bad ones. So while the Fed was then and is now superfluous, its limited mandate in the 30s was correct. And it was correct too in the eyes of Barney Kilgore per Melloan’s quotation of him toward the end of Free People: “In any partnership between business and government, government will always be the senior partner.” In short, banks and the economy more broadly wouldn’t have been made better off in the 30s if the Fed had ignored its limited mandate only to save the insolvent.
As for a supposedly austere Fed being a major cause of the Great Depression, the reality is that even then the vast majority of finance and lending was taking place away from the banks that the Fed projected its always overstated influence through. Crucial here is that we create the credit. When we borrow dollars we’re simply borrowing access to real economic resources. That we are is a reminder that the Fed couldn’t tighten access to credit even if wanted to. So long as production is taking place, there will be “money” to lubricate its exchange. So-called “money supply” was slight in the 1930s because production was, not because of the Fed. If anyone doubts this, they need only imagine the Fed selling bonds to drain Silicon Valley banks of dollars. The lack of money supply would be made up for by domestic and global savers almost instantaneously. The same applies to a booming country. Money supply was once again declining in the 30s because production was. Falling supply wasn’t a driver of the Depression as much as it was an effect of lousy policy that laid a wet blanket on production.
What was the real cause of the Great Depression? There were many policy errors, but Melloan hit on arguably the biggest cause with his early point in Free People that “Hawley-Smoot brought about a virtual shutdown in world trade.” There’s your answer. If we’re not importing, we’re not exporting, and as Melloan revealed in When the New Deal Came to Town, U.S. exports plummeted in response to the misguided tariff. After that, the truly awful effect of tariffs is that they’re a certain sign that we’re not specializing nearly as much as we could be. For a country to erect tariff barriers is the equivalent of a booming business shutting down its WiFi access, or a farmer replacing tractors with shovels, or the owner of a pin factory firing all of his workers only to concentrate on making the pins by himself. If we’re not trading, and by extension dividing up work, we’re quite simply not specializing. And in running away from specialization, we’re rushing toward stagnation. So while there were policy errors in addition to Hawley-Smoot, the collapse of global trade in response to tariffs easily explains why money supply declined. It did because a lack of global cooperation shrank the very productivity that is a magnet for the “money” that is exchangeable for goods and services.
About all this, Melloan’s very own book makes the case that was just made. Indeed, in explaining why the U.S. economy didn’t recess after the 1987 stock-market crash, Melloan writes that the “Reagan tax cuts and free trade measures, as contrasted with the protectionism and tax increases of 1929, had resulted in a healthy investment climate.” Absolutely. Figure that the ’87 crash was a reaction to James Baker’s talking down of the dollar, rumors that the very LBOs that had made U.S. companies much more efficient would be slowed through artificial tax barriers, along with rumblings about substantial protectionist legislation from Congress. But none of the three happened. Alan Greenspan didn’t save the U.S. economy in 1987 as much as he was lucky enough to be Fed Chair when economic policy was generally good. When it took a turn for the worse in the 2000s; as in when the Bush administration talked down the dollar, failed to veto major spending increases, introduced various tariffs, and criminalized the job of CEO (Sarbanes-Oxley), Greenspan’s reputation fell with it.
The dirty little secret is that the Fed is just not that important.
Disagreement about the Fed and bailouts aside, Melloan has another essential triumph on his hands. Free People, Free Markets is endlessly interesting and informative such that readers will be taking copious notes. And hopefully learning from what they’re reading and noting. What a dream if every Congressmen were required to read Melloan’s excellent book. If so, the market rally would make the present one look meek by comparison as investors priced in a much better, much more prosperous future. To learn about why people prosper, read Melloan’s latest. And read it again.