World News: The Weekly Standard
A winning agenda for a political party must simultaneously satisfy the requirements of economic effectiveness and political success. Ronald Reagan had such an agenda in the 1980s. Subsequent Republican presidential candidates have not. The opportunity now is great. Far from having a free hand after reelection, President Obama is constrained by the same economic and political realities as everyone else. This is why his first act of 2013 was to sign into law a tax code in which the top rate on labor income is about twice the rate on property income, disappointing the dominant faction of his own party.
The four basic principles of successful American political economy may be summarized simply:
1. Current peacetime government consumption of goods and services should be funded by current taxation, not money creation—thus limiting peacetime government borrowing to an amount equal to government-owned investments of the same or lesser duration. This principle was first enunciated and implemented under President George Washington.
2. Current consumption of true public goods (such as national defense and administration of justice) should be funded with an income tax levied about equally on labor and property income. This principle was first implemented under Abraham Lincoln.
3. More narrowly targeted “quasi-public” goods, which benefit many but not all citizens, should have dedicated funding. Social benefits for specified individuals (Social Security, Medicare, and Medicaid, primarily) should be financed by payroll taxes on individuals, not by income or property taxes. This principle was first applied under Franklin D. Roosevelt at the insistence of his Treasury secretary, Henry Morgenthau.
The counterpart to this policy is that subsidies to property owners (e.g., tax-advantaged savings accounts and product, corporate, and banking subsidies) should be financed by taxes on property income (such as interest, dividends, rents, or capital gains), not payroll or income taxes.
4. Government’s size and methods should be strictly limited in order not to displace private jobs, or cause general unemployment or disinvestment in people and property. This was attempted by Ronald Reagan (with its success limited by factors we will describe).
In these days of unprecedented monetary activism by the Federal Reserve, including massive purchases every month of federal government debt, it’s nice to see even a fledgling amount of resistance from attentive citizens. A bill now making its way through the Virginia legislature would establish a joint subcommittee “to study the feasibility of a metallic-based monetary unit.”
Last night the House voted 65-32 to approve the bill; now it goes before the Virginia Senate. “The need to establish a sound money unit was deemed so essential for assuring the success of the United States that Thomas Jefferson personally assumed the task of defining the dollar as a fixed standard of value,” the measure notes.
“Our nation’s most fundamental principles – equal rights, rule of law, private property rights, individual liberty – still require a dependable dollar to be meaningfully preserved.”
The bill, if passed, would seek to examine the impact of the Fed’s intervention in banking and credit markets – resulting in near-zero returns on savings accounts and retirement funds – with an eye toward considering “whether a metallic basis for United States currency might engender a more stable money unit consistent with limited government.”
Are we talking about a gold standard? Too soon to tell. But the study would surely seek input from leading monetary experts and constitutional scholars sympathetic to the need for a more rules-based monetary policy – such as Lewis Lehrman and James Grant.
Who caused the financial collapse? Just about everyone.
To appreciate this landmark work it is necessary to know a bit about the author’s background.
John Allison is not only a banker-entrepreneur; he is also a recognized intellectual leader of American business. Moreover, Allison’s financial expertise is a product of his personal biography: In a mere two decades, he built BB&T (Branch Banking & Trust Co.), a comparatively small Southern bank of $4.5 billion in assets, into a $152-billion financial enterprise, making it one of America’s largest and most profitable banks. But unlike many overpaid, underperforming CEOs, Allison focused his leader-manager skills—at modest compensation—on behalf of his employees, customers, and shareholders.
Briefly stated, Allison’s core principles begin with an unapologetic dedication to customer-oriented banking and carefully managed risk-taking as sound and effective means to long-term profitability and high returns on capital. BB&T deploys an uncommon means to sustain the bank’s dedicated corporate culture: continuous, serious, systemic employee education aimed at the formation of leaders, executives, and well-trained employees at every level. A core goal of every employee must be to focus on making every client profitable and successful on a risk-adjusted financial basis—that is, through conservative banking. False financial products were neither fabricated nor widely distributed during the bubble years (such products having been an important cause of the financial crisis). Monthly employee readings in philosophy and economics are mobilized to reinforce the core principles.
At the center of this banking philosophy is the development of the full potential of each employee, and each client, of the bank: This strategy, Allison argues, is the optimum path to shareholder, customer, and employee enrichment. Many firms pretend to such a strategy; Allison earned a national reputation because he actually carried it out, and successfully, in a banking system engaged during the bubble years in a “race to the bottom.”
In a free-market society, it is hard to exaggerate the importance of such a corporate culture. And in business, the individual conscience, dedicated to long-term rational self-interest, is the indispensable condition of a minimally regulated free market. It is striking that Allison’s strategy was vindicated by good returns on capital; it is equally striking that BB&T’s corporate culture was proven right in the financial crisis and Great Recession, as BB&T experienced not a single quarterly loss during the financial earthquake of 2007-2009.
It is necessary to know all this in order to understand the importance of The Financial Crisis and the Free Market Cure. As the head of a major American bank, Allison was witness to the decisions of government, Federal Reserve leaders, and banking CEOs that led to a huge speculative bubble and the collapse of the financial system, including Fannie Mae, Freddie Mac, virtually the entire cartel of big banks and brokers, and major companies. Allison guides us, with a gimlet eye, through taxpayer-subsidized bailouts of these wards of the state, focusing on a reckless, insolvent, privileged financial oligarchy—subsidized by a feckless Fed, a dilatory Treasury, and a politicized FDIC. The coercive power of the federal government, and the moral hazard of excessive regulation, is dissected and debunked.
Bill Clinton, who rode a recession into office and left the scene just before another one began, knows something about the blame game. Addressing the Democratic convention on Wednesday night, he made a full-throated effort to defend the Obama presidency by putting it in the context of past Republican failure.
“They want to go back to the same old policies that got us into trouble in the first place,” he warned, listing tax cuts, financial deregulation, defense spending, and domestic budget cuts as examples. Clinton’s argument was an inch deep, but it recalled the fact that the economic catastrophe that primed Obama’s 2008 victory and has dogged his incumbency remains a liability to Republicans four years later.
If Clinton and his party believe that tax cuts can cause a financial crisis, that’s a new line of attack. If they believe that financial deregulation did it, they have never made a comprehensive case for exactly how. If it was too much spending on defense rather than entitlements, then they should review the boom of the 1980s. The Democrats have never really made a coherent argument of how the GOP caused such misery—they only pointed the finger. Meanwhile, Republicans act as if life began in January 2009.
There remains one explanation that has escaped both sides’ scrutiny because they share culpability for it. Beginning in 2001, easy money from the Federal Reserve flooded the markets with cheap credit, creating asset bubbles and finally tipping the American financial system on its side. This was a period of legitimate economic success (52 consecutive months of job growth under President George W. Bush) mixed with fake wealth attached to real estate and financial assets. No Republican is eager to wade into that story, while no Democrat wants to admit that their current strategy is reminiscent of it: Lean on the Fed to juice the economy.
Reliance on a loose-money Fed did not end well for the presidents who attempted it (Nixon, Carter, both Bushes), while Reagan and Clinton, by contrast, saw the fruits of a strong dollar. But even those relatively successful monetary policy records showed signs of dysfunction beneath the surface. Reagan was fortunate the rest of the world was eager to finance the deficit spending he failed to curb. For Clinton, the tech bubble collapse snowballed into a recession, but only on his way out the door.
What are the chances that President Barack Obama and his Treasury secretary, Timothy Geithner, will ever have anything meaningful to say about monetary policy—beyond continuing to try to coax Federal Reserve chairman Ben Bernanke to print ever more dollars to buy up ever more U.S. government debt? About the same as the interest rate you are receiving on your savings: zero.
That’s why it matters so much for the future of the United States—indeed, the future of the global economy—that Paul Ryan is now on the Republican ticket. Because it’s not just the fiscal fiasco, caused by political cowardice and dithering, that has put our nation on a path to eventual bankruptcy. It’s also the loss of a monetary compass. The value of the dollar has been so compromised through loose Fed policies that it no longer functions as a trustworthy money unit. Instead of providing a reliable tool for measuring what something is worth, or for deciding whether to consume now or save for the future, the dollar has become yet another policy instrument of government.
One notable who’d be a severe critic of our monetary situation today is Thomas Jefferson. In his Notes on the Establishment of a Money Unit and of a Coinage for the United States, written in 1784, Jefferson focused on the need to protect the integrity of the American dollar. A dependable currency would not only unite the former colonies and facilitate commerce throughout the fledgling nation, it would also facilitate individual endeavor and economic opportunity. For the first time, for example, Jefferson argued, a nation’s monetary standard would be based on the decimal system so that business calculations would be simple, honest, and straightforward.
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