Ron Paul at Washington and Lee: Does gold shine?

...based on discussions following Ron Paul's Wednesday January 15, 2013 talk at W&L...

There's a certain fascination with gold; it seems to offer a way to constrain central bankers, at one end of the rules versus discretion debate. Mind you, central banks don't have a stellar track record. The Federal Reserve raised interest rates during the onset of the Great Depression, surely worsening matters. That's a core criticism of Milton Friedman and Anna Schwartz in their Monetary History of the United States. So it's sensible to ask if there's a viable alternative.

Drawing upon Irving Fisher, Milton Friedman played around with rules that focused on the growth of the monetary base. Empirically, the first pass seemed to be OK. However, that turned out to be an artifact of his particular dataset, drawn from the early post-WWII period in which financial institutions in the US were tightly regulated. By 1980-81, when the Fed briefly tried to use such a rule under Paul Volcker's chairmanship, it was clear that there was no stability of the link between creating additional reserves and banks' creation of money. So if not reserves, then let's try targeting monetary aggregates, first M1 then M2. When those proved unreliable, then let's try an inflation target, now part of the legal mandate for the Bank of England. That, too, has problems; the latest iteration is to focus on holding the constant the growth of nominal gross domestic product. As to Friedman, he eventually concluded that none of the rules he proposed would work. But that was in his academic publications, and in talks before economists. He never went back to emend his popular writings that propounded what has been labeled "monetarism." Nor did he support the gold standard; to reiterate, in his analysis it was the US attempt to adhere to the gold standard that turned a recession into the precipitous decline of the Great Depression.

So what's wrong with gold? For one thing, any claim that it provides a stable source of value fails to pass the laugh test. Jewelry fashions come and go; central banks buy gold and then don't; mines dry up; the global economy booms. All affect the price of gold. Over the past 4 decades (setting 1970 = 100) the price rose to 950 circa 1980, then fell to 150 by the 1990s, and has risen again to 750. Traders in shopping malls booths wouldn't have a business scamming people out of their grandparents jewelry and selling overpriced coins if the price of gold was stable. One of the largest sources of gold is Russia; do we want to give Vladimir Putin the ability to thrust us into a recession if somehow Congress were able to forge a direct link between gold and the US macroeconomy? I suspect not.

Now it's unclear why Rand Paul latched onto gold; I suspect it was that he really wasn't "into" economic policy and never did his homework. Then, too, there is the residual impact of the writings Hayek and other "Austrians" that go back to the days when it looked like monetary policy rules might work. That is compounded by the Austrian school's loss of focus once high socialism was no longer a real threat. Hayek and others engaged in broad-brush arguments against socialism, with the Soviet system as their implicit target. It's hard for young people to fathom, but at one time that model seemed a real threat, both with the Red Army's continued occupation of eastern Europe, and the attraction of Stalin and the meteoric rise of of Russia from a backward peasant society to a military and scientific power that could provide many of the appurtenances of middle class life to its core population. In contrast, England's economy didn't do very well after 1914, and did horribly after 1929. In newly independent colonies, the political model also seemed attractive; bedeviled by unnatural geographies and ethnic tensions, democracy didn't look workable in the short run, and presidents who developed a fondness for the trappings of office found Stalin's example of how to hold onto power more useful than trying to learn lessons from Churchill's electoral failures. But in 1989, the collapse of the Soviet Union, and within a few years of Tiananmen, the success of market-oriented reforms in China. No one now views socialism as a threat.

...he had a store of one-liners, but no coherent story...

Unfortunately, the Austrian school has nothing to say to this new world; its raison d'être vanished in 1989. Yes, government is bad. But we're no longer talking about the heavy hand of the central planners in Moscow and their cruder counterparts in Romania or Beijing. The Austrian's broad-brushed treatment is not amenable to empirical exploration; ironically, unlike the teachings of Marx, it is more political philosophy than economics. (Marx's theories, of course, have been found wanting.) So the Austrians have nothing to offer policymakers, they have no ability to provide a nuanced picture of an economy. Another irony is that without the foil of the Soviet Union, those enthralled by the writings of von Mises and Hayek have become doctrinaire, arguing over fine points, hostile to any who are not true believers. I had hoped that mindset died out with the last generation of Marxists, only to find that today it characterizes the Right rather than the Left [both capitalized – after all, they are/were proud of the label].

Now Ron Paul is an engaging speaker; I've heard him. He makes enough sense here and there to encourage people to listen. But he ranges too far and wide. When it comes to economics, he may have a store of one-liners, but they don't add up to a coherent story.

...mike smitka...

What Romney Thinks Matters

...our problem is strong growth!?...

Mitt Romney's choice of a vice presidential is puzzling. As I see it, Paul Ryan's primary strength is that he shares a name with Rand Paul. Ryan has never worked outside the Beltway; he's a pure Beltway insider. Obama at least worked before running for office, as a professor, as a lawyer and as a community activist. (Anyway who thinks Obama is a liberal needs to check where he taught, too -- not too many years ago the Republican Party might have thought he was a little too conservative for them!)

Back to Ryan. I looked at junior's budget proposal months back, and it didn't make dollars and cents -- the arithmetic simply didn't add up. He wanted to reduce the Federal government to 3.75% or less of the economy. But he also promised not to touch the military -- and the Department of Defense and related expenditures are a full 4.0% of our economy. And that's just for starters. I didn't see any point in spending more time on his proposal, but suppose I'll now be forced to read through it carefully. Not today.

In any case, Romney's choice does deliver a clear message, that he views our primary problem as economic growth so strong that it is driving wages up -- because if interest rates are zero, government debt costs our society nothing. As a Wall Street insider, Romney can't claim not to know that. Now wages are our economy's biggest cost. If they aren't rising, we can't have inflation. Food prices go up and down; so do energy costs. But both are modest slices. Ours is a service economy; what matters are not things solid and liquid, but how much it costs to pay someone to cook us a meal, or change a bandage, or set up an IT system.

So Romney must believe that unemployment is not a problem. Too much employment is the problem -- despite the 8.3% headline.

He's out of touch with the world in which I live, with a recent college grad at home, still unemployed. And hasn't Romney read the latest inflation reports from the Bureau of Labor Statistics? -- April, 0.0%; May, -0.3%; June, 0.0%. The average is deflation. For those of you who believe in conspiracies behind every door (and the doors at the BLS are kept locked VERY tight prior to announcements, listen to the August 3rd 2012 Planet Money podcast Keeping the Biggest Secret in the US Economy), well, the Billion Price Project that relies solely on private sector data tells a similar story: there are simply no signs of inflation.

Will Ryan help Romney pull in votes? I'm not a political scientist, and know neither whether Wisconsin is a close race nor whether Ryan is respected there. All I know is that his state is not on the "swing" lists I've seen. Otherwise, unless a VEEP embarrasses the main candidate -- I used to live in Ferraro's home district, and so know up close that some picks are underwhelming -- the apparent reaction of voters is "who cares?" Still, a junior House member doesn't seem an impressive pick.

Does Ryan appeal to swing voters -- well, I think not. I used to dance from party to party, but for a couple decades have lived in a Congressional district where elections haven't been contested, so I don't know whether I can still swing. (My blue suede shoes are Galabrier "Royal Robbins" rock climbing boots from the 1970s, so no, I can't dance.) Still, my gut feeling is that Ryan has no appeal even among moderate Republicans.

I'd like an alternative to Obama. But It doesn't look like the Republicans are providing one this time around.

Mike Smitka

CORRECTION: I do not follow who is whom among politicians, current and would-be. In the process I confused Paul Ryan with Ron Paul Jr (and hence Ron Paul Sr). In the first version of this page I mistakenly wrote that Ryan's strength was his father's name recognition. That is wrong; Paul Ryan's father died while he was a teenager.

Between Iraq and a Hard Place

Thank goodness the sanctions against Iran are like virtually all sanctions: leaky as a sieve. Seldom is there sufficient unanimity to make even relatively concerted action effective.

Now it seems that some in the Pentagon are itching to redeem themselves – an actual government making indisputable threats. Iran is capable of closing the Straits of Hormuz, at least temporarily. But a "measured response" might not reopen the waterways. Would you write a (large) insurance policy on slow and vulnerable supertankers? (Arithmetic: 2 million barrels at $100 per barrel is $200 million) My guess is NO!

The threat, in other words, is more potent than it might seem. The US and its allies will find their ability to see that oil continues flowing more limited than most imagine.

However, as long as Iran can sell oil, they have multiple reasons – in units of US dollars billion – not to shut off the flow of oil. That is, as long as the sanctions are leaky.

If the sanctions "bite" then this calculus changes: there is no longer a downside for Iran, financially. As to domestic politics? Well, the government is hardly popular, but if they really are under attack… That's not such an incredible story, and it's not just the recent dead physicist, it's also our sponsoring Iraq in their 1980-88 war. (Remember our good ally Saddam Hussein? – whatever happened to him?)

So again, thank goodness the sanctions aren't working. Let's pray that continues.

[PS: if you're an economist, you can reframe this as a "game".]

[Sources: See Economic sanctions reconsidered by Gary Clyde Hufbauer, Jeffrey J. Schott, Kimberly Ann Elliott, a two-volume study published in 1990 by the Peter G. Peterson Institute for International Economics. It analyzed roughly 300 examples of international sanctions, essentially all those available at the time. In their judgment less than a handful proved effective in achieving their purported (political) goal. Sanctions thus seem to be aimed at domestic constituents as much as foreign enemies.]
[Addendum of 25 January: I listened to part of the Republican primary candidate in Florida. Ron Paul's argument against involvement in Iraq employs a similar logic. Of course part of what I had in mind was our embargo of Japan in 1941; some in Japan interpreted that as a de facto declaration of war. Paul claims we've already done the same for Iran with the stationing of ships in the Persian Gulf. As far as I know, however, we are not actually forcing oil tankers to stop, and so I stop too from seconding Paul's interpretation.]