It's the Gold Standard, Stupid! Jude Wanniski October 30, 2002

Memo To: Jim Carville, The Rajin’ Cajun
From: Jude Wanniski
Re: The Democratic Disconnect

Of course I don’t mean you are stupid, Jim, but you did become famous for keeping Bill Clinton focused on the economy when you guided him to victory in 1992. The sign over your desk in that campaign, “It’s the Economy, Stupid,” was most useful in separating him from the incumbent, President Bush, whose tax increase and consequent recession cost him a second term. Then Governor Clinton promised the voters “a middle-class tax cut” and that was enough. He quickly forgot that campaign promise after the election, though, pushing through an income-tax increase. In the off-year elections of 1994, the voters then punished the Democratic Party by handing the House of Representatives to the Republicans for the first time since 1952. (When President Eisenhower promised a tax cut, which he then decided against the day after he was inaugurated.)

As you seem to have clearly noticed, there is a great deal of confusion as we head into the congressional elections next Tuesday. President Bush got his tax cuts in 2001, but the stock market has been in terrible shape practically from his Inaugural Day. The unemployment rate continues to inch up, the level of consumer confidence continues to inch down, the budget which was $150 billion in surplus when Clinton left is now that much in deficit – with no relief in sight. And yet the Democrats cannot figure out how to attack the Republicans on the economy. It should be a piece of cake.

The problem Democrats face is that all their economic advisors are demand-siders, for the most part Keynesians, but also some liberal monetarists. How can there possibly be a weak economy with a budget swing in 18 months of $300 billion to the downside? Budget deficits, remember, are what ended the Great Depression, that and we were lucky enough to have been bombed at Pearl Harbor!! At least that’s what the text books say. And how can monetary policy be at fault, when the Greatest Central Banker in All of History, Sir Greenspan, has cut interest rates 11 times in 18 months, or has it been 18 times in 11 months? Anyway, it was 6.5% when Bush was inaugurated and it is now 1.75%.

Just so you know that I am not making fun of Democrats, Jim, check Tuesday's Wall Street Journal editorial page and you will find former Fed Governor Wayne Angell, a respected PhD economist and full-blooded Republican. He writes the lead op-ed, “Greenspan’s Deflation,” which takes more than 1000 words to say that Sir Alan has messed up by not cutting interest rates below 1.75%, which Angell says is too high, and 1.25% would do the trick. You can see, of course, that this would not really get more than yawns on the campaign trail. It just goes to show that when an economist has a one-variable model, it only works when it suits the malady afflicting the economy. When a different kind of sickness comes along, the prescription doesn’t work, and sometimes it makes matters worse.

This is what happened to the economists to whom you have turned in trying to advise Democratic contenders. If the only thing you can say is that the deficits are the problem, and the deficits were caused by the tax cuts, then you have to recommend TAX INCREASES to the voters, which seems scarier than a Halloween witches’ brew. See what I mean? Nothing really makes any sense, yet we all know something is wrong with the national economy. I am happy, at least, to see you are telling Democratic candidates to go easy on war with Iraq, as war with Iraq would really make a mess of the U.S. economy + the rest of the world. But even with the inspectors back in, inspecting, we are not going to see our national economy fixed until we get back on a Gold Standard. You can check with your wife, who is the top political consultant to Vice President Cheney. Mary can tell you that I have been warning her boss and the other Bushies – even before the Inauguration – that it will not matter how many times taxes are cut or how many times interest-rates are cut. The economy will stink and there is no point in buying stocks on Wall Street because the dollar price of gold IS TOO LOW.

It would take too much time to explain all this right now, and it is too late to work it into a campaign for the House or Senate. But if you take a well-deserved vacation after next Tuesday, an ocean cruise perhaps, please take along the long essay I wrote last September, "The Deflation Monster." Or you can check with Bob Torricelli, soon to be the former Democratic Senator from New Jersey, who I began warning about this matter since the deflation began early in 1997. It is like a cancer, which grows and metastasizes over time. I tried to warn my old GOP pals at the Wall Street Journal about the deflation, but they were totally occupied with trying to get rid of Slick Willy. That’s why you can not read about any of this in the alternative press, unless you had happened upon the American Spectator when it ran my "Deflation Monster."

As it appears the Republican Party is simply tired of the responsibilities and obligations of Being in Power, exhausted by the great effort it has made in recent decades. I suggest it should be a Democrat who breaks out of the monetarist box and proposes a Gold Standard. There are a lot of other standards that have fallen into disrepair since Richard Nixon was talked into floating the dollar in 1971, but if you fix the money, Jim, the others will be much, much easier to repair. And I will help, gratis as usual. I’ll do it just for the love of money, to coin a phrase.