Reagan budget director gnashes teeth about dropping gold standard, economists pile on

David Stockman's big column last week about debt trouble in the USA took several hits by notable economists and opinion writers.

The former budget director for Ronald Reagan wrote in the New York Times that the current market highs are not a reason to celebrate but rather a reason to be "very afraid."

Both the Dow Jones and Standard & Poor’s 500 indexes attained all-time hights on Thursday. Stockman, who also has a book coming out called the The Great Deformation, says it is all phony money.

"The modern Keynesian state is broke, paralyzed and mired in empty ritual incantations about stimulating 'demand,' even as it fosters a mutant crony capitalism that periodically lavishes the top 1 percent with speculative windfalls," writes Stockman.

Dropping the gold standard years ago was what doomed the USA:

The state-wreck originated in 1933, when Franklin D. Roosevelt opted for fiat money (currency not fundamentally backed by gold), economic nationalism and capitalist cartels in agriculture and industry.

Then came Lyndon B. Johnson’s “guns and butter” excesses, which were intensified over one perfidious weekend at Camp David, Md., in 1971, when Richard M. Nixon essentially defaulted on the nation’s debt obligations by finally ending the convertibility of gold to the dollar. That one act — arguably a sin graver than Watergate — meant the end of national financial discipline and the start of a four-decade spree during which we have lived high on the hog, running a cumulative $8 trillion current-account deficit.

The ensuing rebuttal from economists and other opinion makers is a great review of the old gold standard debate—mostly because Stockman's prose invites a glove's off response.

Matthew O'Brien at The Atlantic is scathing:

But the bigger point is having some fixed reference point for the dollar. That prevents the Fed from printing money, and the government from running deficits for very long. In other words, it stops the government from intervening in the economy. But "intervening in the economy" is just another way of saying "fighting recessions".

This libertarian worldview is fundamentally a religious one. The Market metes out its punishment for our speculative sins with the quite-visible hand of recessions. And we must accept its judgment. Doing anything to avoid our penance is just blasphemy against the one, true faith.

No surprise what Paul Krugman thought:

Actually, I was disappointed in Stockman’s piece. I thought there would be some kind of real argument, some presentation, however tendentious, of evidence. Instead it’s just a series of gee-whiz, context- and model-free numbers embedded in a rant — and not even an interesting rant.

Jared Bernstein is looking for the argument:

It’s a long piece, bursting with passionate fire and brimstone, but again, at least to me, there’s no cogent argument in here, just assertions: sovereign debt is bad; you’ve got to let the market work out its failures without trying to fix them (there must be “a sweeping divorce of the state and the market economy”); no government investments in industry; central banks shouldn’t mess with the money supply.

Neil Irwin at Ezra Klein's Wonkblog re-examines the gold standard again:

Stockman and I seem to be direct antagonists on this fundamental question: Should government, in particular central banks, endeavor to corral the ups and downs of capitalism to try to steer their nation toward prosperity?

Is basing the value of currency on a yellow metal that people find in the ground really less arbitrary than having a group of sober-minded economists get in a room eight times a year and try to adjust the supply of money so that prices rise about 2 percent annually? I’d take the group of sober-minded economists every time!

Marketwatch's Diana Furchtgott-Roth is more forgiving.

It’s pessimistic, it’s no way to make friends and influence people, but it makes entertaining reading, and some of it is right on the mark.

Despite Stockman’s over-the-top style, it’s a public service for him to shine a spotlight on the Federal Reserve.

Creative Commons image by striatic