Two Freshmen Senators Jude Wanniski February 11, 1997

Memo To: Senators Wayne Allard [R-CO] & Chuck Hagel [R-NE]
From: Jude Wanniski
Re: Senate Banking hearings on CEA Chairman Janet Yellen

I watched you quiz Dr. Yellen on C-SPAN, on her confirmation hearings, and realized you both have an assumption that the reason for the high national debt is the propensity of Democrats (particularly those advised by Keynesian economists) to spend more money than the government takes in. Thereis some truth to that, but not as much as you might think. The White House and the Congress under bomparties in the past 30 years have been much more responsible than the surface numbers indicate. The reason is a confusion about real and nominal government debt obligations. Thirty years ago the dollar was defined by our government as one-thirty-fifth of an ounce of gold. An ounce was fixed at $35 by law going back to 1934, which is what prevented monetary inflation in the U.S. This link began breaking in 1967, as President Johnson began reneging on that promise to foreign bondholders, and in 1971 when President Nixon formally broke the dollar/gold link. That is when the difference between a real dollar and a nominal dollar began. In the 30 years since, the paper dollar has lost 90% of its purchasing power, relative to gold, and to most things that gold could buy at the old rate.

Before you get too hard on the Democrats and Keynesians, you have to divide the nominal national debt of $5 trillion by 10, which gets the real debt to $500 billion. If this sounds fishy to you, measure the nominal debt today vs. the nominal debt in 1945, at the end of WWII, and you will find that the U.S. government's publicly held-debt was then 125% of Gross Domestic Product, and today it is 59% of GDP. If you look at The Wall Street Journal's editorial "Constitutional Boondoggle" of February 4, in opposition to the Balanced Budget Amendment, you will see a chart going back to 1945, showing the decline of the deficit in proper perspective.

Once you get into this perspective, there is less need for Republicans to blame Democrats for taxing and spending like drunken sailors, and less need for Democrats to blame Republicans for causing the deficit to rise via the Reagan tax cuts. By the way, at the time the Reagan cuts passed Congress in 1981, most Keynesian economists said they wouldn't do much good, because they were too small in terms of aggregate demand. It was only after the economy grew enormously — by one-third in real terms in the Reagan years -- that the Democrats looked back and said the deficits would not have happened if the tax rates had remained where Reagan found them.

A lot of silly things have been said in the newspapers by people who simply repeat what they have heard from other silly people. As freshmen U.S. Senators, you can make a great contribution by first understanding why what happened really happened. You will first of all have a much greater respect for democracy, when you see that the people selected for service in the White House and Congress these past 30 years did a pretty good job of it. There really is no need for a BBA to the Constitution as long as we get the paper dollar again nailed down to gold. That event alone will cause the national debt to be refinanced at 3% interest rates instead of today's rates which are double that amount. With higher growth and the cost of capital cut in half by a gold dollar, all or most of the projections of deficits in the Trust Funds will dissolve as well. A new tax system that rewards successful risk-taking will actually produce surpluses in another generation. Things aren't as bad as they seem to be, when you look at all those zeros and hear about gigantic deficits in entitlement programs in future generations.

I take the trouble to write to you two Senators hoping you can spread the word among the others who have just arrived with the 105th Congress. A great many problems Newt Gingrich had in the 104th Congress was in dealing with backbenchers who really believed we were going to hell in a handbasket, and it was up to them to slash federal spending ASAP. Take your time. Get your facts straight. Compare apples to apples. If you have any questions, Trent Lott will vouch for me.