(This item appeared at TownHall on April 15, 2019.)
President Trump has nominated Heritage Foundation economic policy expert Stephen Moore and 2012 presidential contender Herman Cain to fill two of the seven seats of the Board of Governors of the Federal Reserve. They would be excellent additions to the Board.
Both elicited howls of protest among the academic economists, who consider the Federal Reserve their exclusive kingdom. That alone is one good reason to introduce these relative outsiders. Academia, as we all know, is particularly prone to groupthink; and, as the author of three books on monetary economics myself, I would call the degree of expertise among these academic economists “extremely mediocre,” which is a euphemistic way of saying what a salty businessman (like Donald Trump) might call “a bunch of damn fools.”
But better yet: both Moore and Cain are among the very, very small group of leaders who understand what I have long called “the Magic Formula,” and which is the topic of my latest book, The Magic Formula. The “magic formula” is: Low Taxes and Stable Money. If you get these two things right, everything else tends to become manageable and falls into place naturally. If you get either of them wrong — or, even worse, both — a country can quickly enter a “spiral of decline” that can end in complete ruination. Both Cain and Moore (who served as an economic advisor to Cain in 2012) understand this very well.
The idea behind Stable Money is simple: you can’t create wealth by jiggering the currency. (George Gilder’s 2016 book The Scandal of Moneywas an extended investigation of this theme.) But, you can certainly destroy wealth this way. Venezuela’s economic collapse certainly has something to do with the hyperinflation raging through the country. Nor is this uncommon: since 1950, according to statistics from the International Monetary Fund, over seventy countries have suffered a broad definition of “hyperinflation”; not one has gotten wealthy as a result. In U.S. history, the times when the currency is most unstable (the 1970s in particular) correspond with the worst economic outcomes. The most successful countries have had a stable, reliable, unchanging currency, or at least one which approximates this ideal, which allows people to cooperate together in the monetary economy in a productive, wealth-generating fashion.
More than half of all countries today achieve some form of “stable money” by linking their currencies, tightly or somewhat loosely, to a major international currency such as the dollar or euro. They have found, from long and hard experience, there was really no advantage to be had by trying to manipulate their domestic macroeconomy by means of an independent floating currency. Instead, they largely gave up these ambitions, and stuck to an external standard perceived to be of high quality. Among these countries are included all of the countries of the eurozone.
For the first 182 years of U.S. history, between 1789 and 1971, the United States pursued a similar strategy. The value of the dollar was linked, not to the euro as over forty countries are today, but to gold. This was simply conventional wisdom: the German mark, Japanese yen, French franc and British pound were also linked to gold. In short: the U.S. had Stable Money. The result of this, between the years 1792 and 1971, was that the U.S. was the most economically successful country in the world; indeed, the most economically successful country in the history of the world. The final decades of that nearly two-century period, the 1950s and 1960s, were the most prosperous since 1914.
When you do the same thing over and over, for nearly two hundred years, and end up the most successful country of all time, it is probably not because you are making a mistake. It is probably because you are doing something right. Stephen Moore and Herman Cain understand this, as would anyone who is not a damn fool. It not only worked for the U.S., it worked for Britain in the eighteenth and nineteenth centuries, the Netherlands in the seventeenth, and for anyone else who tried it.
For nine generations, Americans got wealthier and wealthier. Since the monetary rupture in 1971, even by the Federal government’s heavily-airbrushed statistics, workers’ incomes have stagnated — exactly as one would expect, according to the Magic Formula. This naturally leads to complaints about “income inequality,” or the gulf between rich and poor. That gulf was always there, as it is in every successful capitalist economy. But, it bothers people now because the common man is no longer making steady improvements, but is instead struggling just to keep even. This leads to socialistic pressures, and commonly higher taxes and unstable money, as we see now with recent calls for 70% income tax rates and Green New Deal fantasies financed by “modern monetary theory.” This is exactly contrary to the Magic Formula, and the result would be predictably bad.
Stephen Moore and Herman Cain have not made a career of monetary economics (although Cain did serve at the Federal Reserve Bank of Kansas City for several years in the 1990s). But, they will help keep the U.S. on track for Stable Money. And also, Low Taxes — Federal Reserve Chairman Alan Greenspan’s insistence on higher taxes in 1993 is one reason President Bill Clinton gave up on his “middle class tax cut” election promises that year. For these reasons, they deserve a seat at the Federal Reserve.