Wednesday, September 9, 2009

Oh! What Might Haven Been...

Steve Forbes

The national focus is on health care, but soon we're going to have to face up to the oncoming entitlement train wreck. The Obama Administration is spending promiscuously even before it's done a lick of work to save Social Security, Medicare and Medicaid. There are positive pro-growth reforms that could preserve these programs for those already on them and those about to enroll, while at the same time instituting a new, stronger system for younger people. The Administration is oblivious to these ideas, but voters ultimately won't stand for being crushed by taxes and slashed benefits.
In the meantime, we can all ponder how different--and richer--our world would be had we enacted the Clark Amendment. In 1935 the Social Security issue dominated Congress, just as health care does today. The Roosevelt Administration was proposing a system in which workers would be taxed at a certain level, with employers matching that.
Even though Democrats overwhelmingly dominated Congress in 1935, there were deep misgivings about such a plan. Senator Bennett Champ Clark (D--Mo.) proposed an amendment to the pending Social Security bill. It would have allowed workers to go with the new government system or, if they wished, to have their money put into a private-insurance plan. Either way, the contributions would be mandatory. The idea of giving people such a choice proved to be extremely attractive. A majority of congressional Democrats were ready to vote for the Clark Amendment, but Franklin Roosevelt went ballistic, furiously denouncing the idea. He intensely disliked and distrusted the private sector, particularly life insurance companies. FDR lobbied hard to kill the Clark Amendment. Even so, the amendment almost passed.

FDR killed Senator Champ Clark's Social Security alternative. We'll need to resurrect it--and soon.
Imagine if the Clark Amendment had become part of the original Social Security Act. We wouldn't be saddled with today's fiscal disaster. Hundreds of billions of dollars that politicians have "borrowed" from the Social Security trust fund for all sorts of pork spending would not have disappeared. Instead, all that capital would have been invested in the economy, leaving us a lot more prosperous. Moreover, the Clark Amendment would have been a model for state pension plans, which are now bankrupting local governments, as well as for other nations.
The Clark Amendment incident is yet another example of how disastrous Franklin Roosevelt was for the U.S. economy, and an inspiration for reforming the system for younger people today.
Weak Dollar = Weak Revovery
A pernicious myth is at work among economists and policymakers, crippling a more vigorous economic recovery. It's the idea that a stable dollar means austerity and economic weakness. To get a stable greenback, the thinking goes, you have to withdraw cash from the banking system, so that dollars become scarcer and thus the remaining ones become more valuable. And doesn't having fewer dollars mean hurting the economy?
The opposite is true. Investing in plants, equipment and startups is risky enough. Add in the uncertainty over the value of the currency, and you get paralysis. Those with cash find it prudent just to sit on their hands and await developments or to speculate in commodities and currencies. A stable dollar would enormously help to break the investment logjam. It would also attract foreign capital--which our weak dollar currently repels. A volatile currency is the equivalent of a floating clock. Imagine how disruptive it would be if each day you didn't know how many minutes there were going to be in an hour?
How do you get a trustworthy currency? Not by starving or flooding the economy with liquidity. You don't get your car moving by flooding the engine with fuel nor do you get far by stalling it with insufficient fuel. You get the economy moving by giving it the liquidity it needs.
The most reliable fuel injector and gauge of liquidity is the ultimate four-letter word in government and central bank circles: gold. The intrinsic value of what John Maynard Keynes wrongly dubbed the barbarous relic doesn't change. All the gold that has been mined still exists; you can't consume it like corn or burn it like coal. It's rare but not too rare. Gold is a fixture. It's been the best guide for monetary policy because, like Polaris, which has been used to navigate by since time immemorial, it remains nearly stationary.

Global leaders had a grand time at April's G-20 Summit, while achieving nothing. The September confab won't be any different.
If Ben Bernanke, who has been given another turn as chairman of the Federal Reserve, would decisively declare that the Bush era's weak-dollar policy is over and that the Fed's monetary policy will henceforth be guided by commodities in general and gold in particular, the value of the dollar would soar--and without a single greenback having been withdrawn from circulation. The price of gold--and oil--would drop sharply. It's the fear of inflation that's keeping these commodities up.
Alas, Bernanke shows no grasp of the need for a strong currency. He doesn't understand that pumping liquidity into banks isn't the way to prevent economic hard times or stimulate better ones. He has ignored the example of Japan in the 1990s, when there was bank liquidity but little lending. Thus the paradox: Despite banks being loaded with almost record amounts of cash, bank lending has been down in recent weeks. Moreover, Bernanke promised early this year to revive the credit markets for small businesses and consumers, but the Federal Reserve has never taken action. He vowed the central bank would buy gobs of packages of such loans, but he never followed through. The critical securitization market for these kinds of loans remains largely dormant, which is the main reason that small businesses are still--and unnecessarily--suffering: Too many of them can't get credit.


We therefore have a situation in which a major cause of the lackluster recovery is being ignored. We are told that a dependable dollar must first await recovery, which is like saying we can't deal with mosquitoes until we first get rid of malaria.
In a few days leaders from countries representing 85% of the world economy will gather in Pittsburgh, Pa. for the G-20 Summit. There will be considerable backslapping and mutual self-congratulation that they have prevented Depression 2.0. There will also be a lot of pious palaver about the need for more cooperation, better international regulation and new initiatives to fight protectionism and promote free trade. Doing something effective and substantive, such as creating a modernized version of the gold-based Bretton Woods international monetary system--which lasted from the end of the Second World War until the early 1970s and gave us an era of great, noninflationary economic growth--will not even be broached. Had a Bretton Woods-type arrangement been in place during recent years, the current crisis would never have happened. The Fed simply would not have been able to print so much money and keep interest rates so low for so long.
If Bernanke can't get it right regarding the greenback, let's hope he at least takes the lead in beating back bank regulators and auditors who are still pressuring banks to curb lending and write down the value of existing and still good loans.
Prince of Enlightenment
America's premier political pundit and reporter, Robert Novak, died last month at age 78, after long bouts with cancer. He was a journalistic entrepreneur in a pantheon with the likes of Theodore White, whose The Making of the President books changed how presidential campaigns were covered. Novak's big breakthrough came in 1963, when he teamed up with Rowland Evans to write a syndicated column on politics for the New York Herald Tribune. (The Alsop brothers--Joseph and Stewart--had unsuccessfully tried such a venture years before, but they did their best work when they wrote individually.)
Evans and Novak had been distinguished reporters, but together they became the gold standard for information and analysis. This then-young political junkie was hooked on them from the get-go. Novak, especially, developed fantastic and voluminous sources and had the gift of seamlessly mining sources for additional and fascinating fodder.
Novak also broke ground on cable television, persuading CNN to let the two do a weekend show called, no surprise, Evans & Novak. Bob also begat two other CNN programs: The Capital Gang and Crossfire--and owned a piece of all three shows.
When I ran for the White House in the mid-1990s, appearing on Evans & Novak was an absolute must. As when you were a guest on Meet the Press, you prepped for an appearance before Evans and Novak as if you were facing a grueling oral doctoral exam.
Liberals called Novak the Prince of Darkness. Bob embraced the moniker and turned it into a marketing plus, using it as the title for his memoir, which has become something of a classic in the genre.

Robert Novak and Rowland Evans launching their legendary political column in the early 1960s.
Novak's mind never stood still. In the 1960s he was a moderate to liberal Republican. But by the late 1970s he had become a Reagan conservative. He was about the first noted national political reporter to actually understand supply-side economics, including monetary policy. As did Reagan, Novak grasped that a combination of sound money, low tax rates, restrained government spending and a strong military were the ingredients for a vibrant economy and a safer world.
One of the highlights of my life was two years ago, when Bob urged me to participate in the inaugural forum put on by the Academy on Capitalism & Limited Government Foundation, sponsored by the University of Illinois at Urbana-Champaign. An alumnus of the university, Novak was the principal speaker and moderator of the event. Immensely flattered, I accepted.
Bob's integrity was absolute--he was as hard on Republicans as he was on Democrats--and thankfully he possessed a skin of armor. When Novak was accused of "outing" the name of a CIA operative in a 2003 column, Democrats saw it as a way to hit the Bush Administration. They clamored for a special prosecutor, despite the First Amendment implications. (That this particular individual worked for the CIA was hardly a Beltway secret.) Novak's reputation survived like the Rock of Gibraltar. His source, Richard Armitage, was principal deputy to Secretary of State Colin Powell.
Bob--and, more important, the spirit in which he lived--will be much missed.

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