"I’ve been asked if I have any regrets. Well, I do. The deficit is one.” — Ronald Reagan’s farewell address.
When Ronald Reagan was elected president the Dow Jones Industrial Average hovered around 1,000 (less than 2,800 inflation adjusted) — and had dipped, under President Carter, as low as 759. Unemployment stood at an unacceptable 7+%. The Soviet Union was aggressive, bellicose, and, in the eyes of the Western policy elite, could be but contained, not challenged. At the end of Reagan’s eight years in office, the Dow had tripled in value, on its way much higher. Job growth was vibrant. The USSR was well on its way to dissolution.
How did this happen? Rep. Jack Kemp and his team of visionary economists and policy advocates inspired what became known as “the Supply-Side Revolution”. The “cabal,” as it was then known, pressed for a fundamental policy transformation away from high tax rates (70%) and easy money (13+% inflation) to low marginal tax rates and good money. They faced enormous ridicule by the policy elites, being mocked by, among others, Reagan’s foremost rival for the presidency, George H.W. Bush, who derided the modern Classical economic thinkers as practitioners of “voodoo economics.”
Ronald Reagan, adopting the Kemp formula, had a lot on his plate. While restoring economic growth and confronting the expansion-minded totalitarian Soviets, something got left behind: cutting federal spending and thereby balancing the budget. It is this unfinished business which Rep. Paul Ryan, rising to Congressional Budget Committee chairman and now Vice Presidential nominee-designate, took on as his Quest.
The fundamental things don’t change as time goes by. The great anti-federal-profligacy hawk within the original group of Kemp advisers was Lewis Lehrman. According to Evans and Novak’s book on this era, The Reagan Revolution (Dutton, 1981, p. 118), “Lewis Lehrman… disagreed fundamentally with his friends Laffer and Wanniski on the budgetary question. Lehrman believed dramatic and drastic expenditures reduction was no less imperative than tax reduction, rejecting Kemp’s notion of greater priority for the latter.”
Lehrman, described by Kemp adviser and author of The Way the World Works Jude Wanniski, as a 42-year old “financial wizard”, wrote a key transition memo for president-elect Reagan and his team:
The previous administration sewed chaos, and, I regret to say, President-elect Reagan may very well reap the whirlwind. If he is not ready, if he does not understand what is happening, he could easily be swept away by its hurricane velocity. The extraordinary coincidence is that these were very much the same conditions which greeted Margaret Thatcher when she inherited the whirlwind from her predecessors — the big spending socialists. I might add that these were the very same conditions that caused the collapse of the Fourth Republic in France in 1958. Except that President DeGaulle understood the causes of collapse. The Fifth Republic, his creation, was born amidst his program for currency stability, budgetary equilibrium, and economic renewal and growth . . .
The following policies must be presented to the President-elect. …
1) His administration must move much more rapidly than originally planned to establish budgetary equilibrium in the federal government.
2) The budgetary policy must be concerted with Federal Reserve monetary policy in a planned and coherent way. This coherence has been lacking in every economic and monetary program with the goal of stabilization in the past 20 years.
Reagan, focusing on cutting tax rates and confronting Soviet totalitarianism, certainly had his priorities straight. But ignoring Lehrman’s advice left him with a regret: the deficit. In selecting Paul Ryan as his running mate, Gov. Romney has selected a soulful and charismatic young man who is committed to tackling one of these two major unfinished aspects of the Reagan Revolution. To bring about both growth and spending restraint, however, will require achieving both key elements of Reagan’s incomplete agenda, including monetary reform.
Shortly after Rep. Paul Ryan first released his “Roadmap” last year Lehrman, the eminence grise of the classical gold standard, published a column in the Wall Street Journal entitled “Monetary Reform The Key to Spending Restraint” :
No man in America is a match for House Budget Committee Chairman Paul Ryan on the federal budget. No congressman in my lifetime has been more determined to cut government spending. No one is better informed for the task he has set himself. Nor has anyone developed a more comprehensive plan to reduce, and ultimately eliminate, the federal budget deficit ….
But experience and the operations of the Federal Reserve system compel me to predict that Mr. Ryan’s heroic efforts to balance the budget by 2015 without raising taxes will not end in success—even with a Republican majority in both Houses and a Republican president in 2012.
The problem is simple. Because of the official reserve currency status of the dollar, combined with discretionary new Federal Reserve and foreign central bank credit, the federal government is always able to finance the Treasury deficit, even though net national savings are insufficient for the purpose.
This monetary reform would provide an indispensable restraint, not only on the Federal Reserve, but also on the global banking system—based as the system now is on the dollar standard and foreign official dollar reserves. Establishing dollar convertibility to a weight unit of gold, and ending the dollar’s reserve currency role…would also prevent access to unlimited Fed credit by which to finance ever-growing government.
One of the key distinctions between conservatives and liberals today is over monetary policy. The GOP, with full support of its movement conservative base, of tea partiers, of libertarians, the supply-siders, and of public intellectuals such as Lehrman(whose institute this writer is professionally associated), Dean Glenn Hubbard and Prof. John Taylor, have united around the imperative, for restoring prosperity, of a rules-based monetary policy. The Democrats, supported by its liberal base and by public intellectuals such as Paul Krugman, advocate a policy of discretionary activism. Both groups cannot be right.
America’s economy thrived, under Reagan and Clinton, creating millions of jobs per month, rather than per year, under what is known, monetarily, as the “great moderation.” Thus there can be no mistaking the key importance of monetary policy in restarting the economy and generating jobs. Yet central planning of monetary policy by a Gosplan of 12 Federal Reserve governors, however brilliant and well intended, is inherently defective and will come, as it came, a cropper. Bad money was the proximate cause of the Great Recession and lingering 8% unemployment.
A crucial debate between monetary policy proponents is ongoing within the GOP. The discussion is whether to adopt a price rule, as favored by academic economists, or the golden rule as favored by Lehrman, by Forbes Chairman and Editor-in-Chief Steve Forbes, by financier/philanthropist Sean Fieler (and the American Principles Project, which Fieler chairs, with which this writer is professionally associated), by incoming Cato president John Allison, by former CEO and presidential aspirant Herman Cain, by Atlas Foundation’s Judy Shelton, and is looked with favor upon by Weekly Standard editor (and Ryan devotee) William Kristol, among many, many others.
Without diminishing the importance of tax, spending, and regulatory policy, if Romney wins his administration’s getting monetary policy exactly right will prove the determining factor in restoring vibrant economic growth as well as ending federal profligacy. If a President Romney and Vice President Ryan do not wish to court a similar pang of regret upon departure from office as that suffered by the great Reagan it is essential to take seriously that golden option.
4% growth — promised by Gov. Romney — never has been sustained — not even under Reagan or Clinton — for sustained periods under a fiduciary money such as Federal Reserve Notes. History demonstrates that sustained 4% growth is achievable, uniquely, through the classical gold standard. Paul Ryan: history beckons you to help Team Romney complete not one but both movements of Reagan’s Unfinished Symphony in order to achieve the object of your Quest: prosperity and an end to federal profligacy.