The key phrase in President Obama’s acceptance speech was this:
I won’t pretend the path I’m offering is quick or easy. I never have. You didn’t elect me to tell you what you wanted to hear.
You elected me to tell you the truth.
And the truth is, it will take more than a few years for us to solve challenges that have built up over decades.
This claim displays the sad obliviousness of a well-intended, but apparently befuddled man making a very hollow promise. Getting the policy mixture right would lead to a return to economic vibrancy quickly, perhaps even immediately. This columnist has cited an example of this before. It is so startling, and heartening, it bears repeating.
German Chancellor Ludwig Erhard, the architect of the post-war German economic miracle, quoted this in the chapter entitled “Birth of the Market Economy” in his classic Prosperity Through Competition:
The big chance for Germany came in 1948: it depended on linking the currency reform with an equally resolute economic reform, so as to end once and for all the whole complex of State controls of the economy-from production to the final consumer-which, following in the wake of the people’s nonsensical demands, had lost all touch with reality. Today few can realize how much courage and sense of responsibility were needed for such a step. Some time later two Frenchmen, Jacques Rueff and Andre Piettre, summed up the combination of economic and currency reform thus:
‘The black market suddenly disappeared. Shop windows were full of goods; factory chimneys were smoking; and the streets swarmed with lorries. Everywhere the noise of new buildings going up replaced the deathly silence of the ruins. If the state of recovery was a surprise, its swiftness was even more so. In all sectors of economic life it began as the clocks struck on the day of currency reform. Only an eye-witness can give an account of the sudden effect which currency reform had on the size of stocks and the wealth of goods on display. Shops filled up with goods from one day to the next; the factories began to work. On the eve of currency reform the Germans were aimlessly wandering about their towns in search of a few additional items of food. A day later they thought of nothing but producing them. One day apathy was mirrored on their faces while on the next a whole nation looked hopefully into the future.’
The German Economic Miracle, in which “If the state of recovery was a surprise, its swiftness was even more so,” was no anomaly. It happened for FDR as well. It therefore comes as poignant that Obama, in his acceptance speech, pivots to FDR in a way that shows him oblivious to what FDR got right. Obama:
It’ll require common effort, shared responsibility, and the kind of bold, persistent experimentation that Franklin Roosevelt pursued during the only crisis worse than this one.
FDR got adjusting the valuation of the dollar, which had grown grotesquely distorted under the pseudo-gold standard then in place, right. The economy responded immediately. As this columnist has elsewhere observed:
As [French monetary statesman Jacques] Rueff observed in The Monetary Sins of the West (The Macmillan Company, New York, New York, 1972, p. 101):
Let us not forget either the tremendous disaster of the Great Depression, carrying in its wake countless sufferings and wide-spread ruin, a catastrophe that was brought under control only in 1934, when President Roosevelt, after a complex mix of remedies had proved unavailing, raised the price of gold from $20 to $35 an ounce.
As investment manager Liaquat Ahamed wrote in his Pulitzer Prize winning history Lords of Finance: The Bankers Who Broke the World (The Penguin Press, New York, 2009, pp. 462-463) [stating what ensued]:
New orders for heavy machinery soared by 100 percent, auto sales doubled, and overall industrial production shot up 50 percent.
The disorders in our modern monetary system are dramatically different from those faced by FDR. The economy now appears to be suffering from a depreciating dollar. But the principle remains. Good monetary policy is requisite to kindling economic growth. This is the crucial insight.
Of course, the centrality of monetary policy — and its absence from the Republican presidential agenda, creates an opening for Obama to attack. Obama:
They want your vote, but they don’t want you to know their plan. And that’s because all they had to offer is the same prescription they’ve had for the last thirty years:
“Have a surplus? Try a tax cut.”
“Deficit too high? Try another.”
“Feel a cold coming on? Take two tax cuts, roll back some regulations, and call us in the morning.”
This aspect of the president’s critique faintly echoes that of Forbes Opinions and RealClearMarkets.com editor John Tamny. Tamny, correctly, has made the need for monetary reform — optimally, restoration of the classical gold standard — a recurring theme. In his “Tax cuts great, but not enough”, he observes:
Bush-era rates should be made permanent, but they alone can’t jolt the economy into high gear.
Here’s hoping Congress does, in fact, make the tax cuts permanent. If, so, however, investors and citizens more broadly would be wise to curb their enthusiasm. In no way would such a move signal that the U.S. economy is set to roar.
[A]bsent better dollar policy or, specifically, a commitment on the part of the Geithner Treasury in favor of a stronger dollar, neither the economy nor stocks will rebound in any long-term way. They won’t because a weak dollar works at cross purposes with tax cuts given that a weak dollar is anti-investment, and as such, anti-job creation.
Currency devaluation always and everywhere is anti-economic growth – and terrible for stocks – because savers and investors have no reason to do either, faced with eroding returns.
This is a theme to which Tamny returned last month:
… Romney could get taxes, trade and regulation right, but still fail if he continues the weak dollar policies of Bush and Obama. There are no jobs and no companies without investment, and there will be no major investment boom absent a stronger dollar.
Ironically enough, Romney’s indistinct program provides a platform for the “the kind of bold, persistent experimentation” extolled by Obama as FDR’s signature. And Obama has chosen to stand in the stand-pat shoes of Big Government Herbert Hoover. Obama demonstrates his trademark cynicism, and selective memory, when he says “all they had to offer is the same prescription they’ve had for the last thirty years.” Those thirty years were by no means homogenous. They contain two periods of respectable growth: Reagan and Clinton. Both presidential administrations shared the common denominator of lower marginal tax rates, good monetary policy… and the creation of millions of jobs a year, not, as Obama bleakly offers, a million jobs over four years.
Obama, belying his slogan of “Forward,” relentlessly pushes to return America to the Ford-Carter era of higher marginal tax rates and easy money. Romney credibly promises to get tax policy right and offers a possibility of monetary reform. Obama declaims: “The path we offer may be harder but it leads to a better place.” He’s half right. Obama’s path is harder. But it leads only to more of the same… and to ever greater hardship.