The American Spectator

Streetcar Line

Staunching Stagflation

By Quin Hillyer on 2.28.08 @ 12:04AM

It's getting bad out there.

Three months ago, when I wrote the first of two columns (see here and here) warning about the imminent return of "stagflation" to the American economy, the very term itself seemed unfamiliar to some readers. Serious inflation has not been a problem here for 27 years, and the combination of inflation with a possible recession has seemed utterly unthinkable ever since Reaganomics started working its magic.

Now, though, the word "stagflation" is popping up in headlines everywhere. The annualized inflation rate for the past three months has been 6.8 percent, while unemployment is creeping up and growth is slowing. The prices of oil and of gold hit new highs about every other week, while the dollar continues to drop to new lows compared to other world currencies.

This is serious stuff -- and government "stimulus" packages, which are like giving whiskey to the town drunk, only make things worse.

If President George W. Bush wanted in the deepest recesses of his soul to do everything to stop John McCain from winning the presidency this fall, he would be concocting an economic stew exactly like the one that is developing right now. There is no way, none on God's green Earth, that any Republican can hold the White House if the economy starts looking like that of Jimmy Carter.

And while there are indeed some partial solutions available in the tax code (involving investment taxes and corporate income taxes), the simple political fact is that the Democratic Congress this year will not even consider passing the necessary legislation.

The "monetary" (rather than "fiscal") side of the equation is where most of the solutions lie, anyway. The Treasury, which operates under the direction of the White House, and the Federal Reserve Board, which in practice can be nudged by the White House to do at least some of the president's bidding, still have it in their power to take preventative action.

What is desperately needed is less difficult than it looks: Strengthen the dollar. Now.

This is actually a politically salable issue. Political consultants may not think this is an issue the public can get a grip on, but they are wrong. Even television commercials now are making reference (in humorous fashion) to the rapidly declining value of the dollar, and supermodels are asking for payment in Euros because the Euro is seen as more stable.

Voters may not understand all the ins and outs of monetary policy, but they will react viscerally -- partly out of patriotism and civic pride, partly out of common sense -- to any suggestion that the dollar should be anything but the strongest currency in the world.

Plus, it is amazingly easy to make connections between a weak dollar and the rising prices that are starting to really scare American voters.

HERE IS WHERE John McCain should come in. He can inoculate himself against economic problems by making dollar strength a central issue of his campaign. Here's what he should say:

"My friends, I won't try to fool you: My expertise is not in all the minutia that the Federal Reserve Board delves into. I am an airman and a senator, not an economist. But some things in economics are pretty straightforward. One of those simple truths is that no economy can thrive if its currency isn't stable -- if, in the case of the United States, the value of a dollar is substantially different one week, one month, one year to the next. This is not a liberal notion or a conservative notion; it is an economic truth agreed upon by the two most famous late, great economists of the 20th Century. John Maynard Keynes on the left and the Milton Friedman on the right both agreed that the value of the dollar should remain relatively stable. The price of goods and services should be measured by a dollar whose value is understood by every citizen.

"Unfortunately, both the current administration and the Federal Reserve Board have abandoned this truth and concentrated on the wrong monetary goals. In doing so, they have let the dollar lose its value against every important commodity, from gold to oil to an assortment of other minerals and produce, and to lose its value when measured against almost every other major currency in the world. I therefore call upon the Federal Reserve Board to make dollar stability its central mission, and I call upon the President and the Treasury to assist the Fed in this task.

"A stronger, more stable dollar will encourage reinvestment in our economy. A stable dollar will boost consumer confidence. A stable dollar will reassure the financial markets here and abroad.

Letter to the Editor

topics:
Taxes, John McCain, Television, Economics, Business, Iraq, NATO, Oil