So, as the headline has it, begins the subtitle of John Tamny’s latest book, Who Needs the Fed? It might have been even more aptly titled The Emperor Has No Clothes. It explodes the myth that government agencies, especially the Federal Reserve System, can be a force for prosperity and with justice for all.
John Tamny herein provides the recipe for an American Economic Miracle. Those who find the Fed a soporific subject need not recoil. This book (full disclosure, in which I generously am noted in the acknowledgements) is about people.
It is all about how innovation of, by, and for the people, not the government, is the true engine of equitable prosperity.
Tamny has been handsomely praised by George Will as “a one-man antidote to economic obfuscation and mystification.” Steve Forbes writes of his new book, “Like a blazing sun melting away a dangerously thick fog, this delightfully written, well-argued and insightful book.… It will become one of the most enormously — and positively — influential treatises of our time.”
Two score and seven years ago our forefathers — Jack Kemp, Robert Mundell, Arthur Laffer, Jude Wanniski, Lewis E. Lehrman, and Steve Forbes, among others — brought forth upon this continent a new nation, conceived in Liberty, and dedicated to the proposition that all men are created equal. Supply-side economics proved a powerful remedy for stagflation and for the creation of an era of historically unprecedented equitable prosperity.
Now a new generation arises to advance the revolutionary thinking of us Old Guard supply-siders. Tamny revises and extends the guiding principles of supply-side economics to tackle a new set of challenges. In so doing he joins the ranks of our most important rising thought leaders.
In this successor to his Popular Economics: What the Rolling Stones, Downton Abbey, and LeBron James Can Teach You About Economics, Tamny draws on popular culture to make and anchor his premier point: “Achieving economic growth and prosperity is as simple as removing the four main governmental barriers to production.” These barriers are “excessive taxes, burdensome regulations, tariffs that limit one’s ability to trade freely, and money deprived of its sole purpose as a measure of value.” (To the purpose of money I would add the “medium of redemption,” an indispensable feature of a true gold standard as pointed out by Prof. Lawrence White.)
Tamny herein drills down on a point he made in Popular Economics on the nature of credit. The misunderstanding of the nature of credit has led to austerity rather than prosperity:
Stated simply, credit is not money. If it were, the ‘easy credit’ that that many-who-should-know-better clamor for would once again be as simple as printing lots of money. In fact, credit is always and everywhere the actual resources — tractors, cars, computers, buildings, labor and individual credibility created in the real economy. We borrow ‘money,’ but we’re really borrowing resources. Credit equals resource access.
To embellish on Tamny slightly, the very word “credit,” according to the New Oxford American Dictionary, derives “from French crédit, probably via Italian credito from Latin creditum, neuter past participle of credere ‘believe, trust.’” Credit is not a “thing.” It is trustworthiness, deriving from the character of the borrower.
This is a point Tamny makes repeatedly. It bears repeating. Sometimes the simplest points prove the most profound and yet the most overlooked. Tamny provides a starting point for a radical (“from the root”) fresh look at economics. It’s about human action. Prosperity is rooted in innovation which derives from freedom plus credit. It’s very human.
One of my own obsessions is that perhaps the fundamental problem today in our politics and our economy is the application of technocratic solutions to humanitarian problems. This almost never works.
Our experts, today technocrats, treat the economy as a big machine, using “policy levers” in a misguided attempt to manage the thing. Tamny throws a nice round anarchist bomb into the technocratic myth by observing that “What economists and politicians too often miss is that an economy is nothing more than a collection of individuals.” Leveraging people is a wrong model. Like the Fed’s own Dynamic Stochastic Equilibrium Model, it never works.
Tamny occasionally may overstate his case. He does not seem fully to grasp how fundamental to supply-side was growing the denominator of the private sector thereby relatively shrinking the size, and distortion, of the government sector’s numerator. Yet he’s not wrong.
He’s on to something profound. Call it humanitarianism.
Economics has fallen into the hands of technocrats. Their pseudoscientific pretensions caused distress to the great humanitarian economist Hayek. Hayek devoted his Nobel Prize lecture, The Pretense of Knowledge, to deploring the dangers of “scientistic” thinking, which apes the form but loses the substance of science.
The modern economics profession imprudently, even impudently, forgets its roots in “moral philosophy.” Once severed from these roots economics begins to wither and die. Tamny rejoins economics and moral philosophy. This is big.
Tamny is merciless with the pretensions of the modern economics profession which promises great things but mainly delivers misery. Recall that the characterization of economics as “the dismal science” was coined by Thomas Carlyle in his defense of the institution of human slavery, forever tarnishing his own reputation.
Tamny demonstrates himself to be passionately committed to equitable prosperity. He can be categorized as a radical neo-classicist and a profound humanitarian. He writes in the tradition of the late, great Warren Brookes, whose book, The Economy in Mind, he several times cites.
Tamny is hardly didactic. He makes his points with abundant anecdotes from, and references to, contemporary pop culture.
He commences with a story about Uber rescuing his wife from having to wait hours for a Metro train after a Taylor Swift concert. He reflects on the implications of Uber and continues, later, with reflections on Taylor Swift’s wealth and creditworthiness.
Tamny devotes a full chapter to what professional sports teaches us about credit.
Then he takes us through an amazing story of how hard it is, even for wildly successful producers, to get a Hollywood movie financed. He then shows how venture capitalism works in Silicon Valley and why failure there is considered a badge of honor.
He offers an instructive little-known story of Donald Trump’s application to Security Pacific Bank for a loan to revitalize the Ambassador Hotel. The bank had been burned previously by loaning more money than was prudent to the charismatic Peter Ueberroth. Having only partially internalized the lesson it then lost a shirt to Trump.
Tamny walks the reader through the ups and downs of the oil industry, particularly the controversial practice of “fracking.” Then he shows how fractional ownership of private jets works.
After providing a tart tutorial on how the government is always destroying, not creating, credit the ever exuberant, never irrational, Tamny writes:
It’s always exciting to remind readers that the best way to understand how we’ll all live in the future is by observing how the rich live today. Arguably one of the more desirable luxuries the rich enjoy to the exclusion of the rest of us is access to private flight.… What’s exciting is that we don’t have to worry about how private flight will be turned into a common good; we can just wait for entrepreneurs to deliver it. Odds are the wait won’t be a long one.
Tamny thereafter demolishes the theory that fractional reserve banking is somehow sinister and shows how there is no “money multiplier.” He meticulously explains how the federal regulations on banking make no sense and then asks whether conventional banks and banking may be a thing of the past.
Tamny exposes many of the Fed’s sins and then makes a strong argument for the Fed’s relative inconsequentiality. Not least of the Fed’s sins are its proclivity to direct capital out of productive and into unproductive sectors and to adopt the discredited Phillips Curve, conflating full employment with inflation. But while he derides the Fed he concludes that its economic influence is much less than commonly posited.
He thereafter reveals how the quantity theory of money cannot be right is made obvious from watching HBO’s The Wire — or even by simply looking out the window when your Amtrak train transits the tragic ruin that was downtown Baltimore. Tamny’s stance: So much nonsense, so little time.
Tamny concludes with a meditation on robots. Rather than portending a dystopian future he predicts that robots will be be a force for improving the general standard of living much like the washing machine, car, computer, ATM, and Internet.
After providing a virtuoso demonstration of how the U.S. president, not the Fed, is the true source of determining the value of American money, he presents his “ideal dollar policy.” It is worthy of special note:
Figure the Constitution empowers Congress ‘to coin money, regulate the value thereof,” and ‘fix the standards of weights and measures.’ If so, the easy answer is for Congress to redefine the value of the dollar in terms of a commodity known for its stability [in real, not demonetized nominal, terms], like gold, and let the market price of gold regulate how many dollars the economy requires. For the sake of discussion, let’s define the dollar as 1/1000th of an ounce of gold. If the price of gold rises above say $1,000/oz., then that would be a signal of too many dollars in the economy. If it were to fall below $1,000, then that would be a signal of demand for dollars outstripping supply.
Tamny, like Hayek, has a deeply jaundiced view of the competence and benevolence of government. He takes it, a là Hayek, a step further:
Perhaps an even better solution [to the problem of dollar policy] would be for Congress, once again, per the Constitution, to simply define the dollar (let’s again assume at 1/1000th of an ounce of gold), only to leave the creation of actual money to the private sector.
[A]rguably the best answer in light of the U.S. Treasury’s sad oversight of the dollar in modern times is to fully legalize private money without any Treasury or congressional input. Perfect money is that which is unchanging in value. Market actors produce all manner of other necessary goods. Why not empower them to compete on money, too?
Tamny, with characteristic brio, makes a penultimate observation:
There’s so much to be optimistic about precisely because the answers to our prosperity are easy. Reduce the weight on freedom and credit creation that is government, and the quick result of doing so will be immense prosperity.
“Immense prosperity.” Lest this optimism be mistaken for the cockeyed variant let us not forget the immense, and strikingly fast, transformation of the American economy initiated by Reagan in applying the supply-side formula. The day before Reagan officially announced his candidacy for president on November 13, 1979, the Dow was — no kidding — at 813.
Reagan undertook his reforms — both tax-rate cutting and stable monetary policy carried out under his auspices by Paul Volcker — to the utter dread of most of the experts of the day, including many of his own.
Yet look where we now are. As of this writing, the Dow is at 17,873. Way up from 813. Many countries having adopted Reagan’s low-tax rate, stable currency, policies the world GDP (not adjusted for population or inflation) is up from just under $10 trillion to over $77 trillion. Let Paul Krugman rave on.
These outcomes are by no means anomalous. Consider bombed-out, post-WWII, Germany. Its industrial infrastructure largely had been destroyed. Afterwards West Germany (and, separately, East Germany, for much longer) was stifled by a post-war economic regime imposed by the occupying powers.
Ludwig Erhard then initiated a reform regime based on underlying principles indistinguishable from Tamny’s. This became known as the Wirtschaftswunder, the German Economic Miracle. In his book Prosperity Through Competition Erhard quotes Jacques Rueff and André Piettre about the dramatic turnaround beginning on the very day of the reform:
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 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 in their faces while on the next a whole nation looked hopefully into the future.
Erhard conducted his reforms against the advice of his experts. Germany never looked back. Prosperity flourished.
French president De Gaulle later conducted a somewhat comparable, if less comprehensive, economic reform for France under the advice of the same Jacques Rueff. De Gaulle’s cabinet unanimously opposed his measures. De Gaulle’s policies gave rise to what became known as the French Economic Miracle.
So much for the advice of technocrats. An American Economic Miracle would be even easier to achieve. Freed of inane government shackles, as the German and French precedents show, people consistently prove to be superb wealth creators.
A smart new generation of economic policy advocates now takes the field in this new millennium. Welcome John Tamny and his exuberant, humanitarian commitment to policies of widespread prosperity.
Tired of being poor? All that may be needed to unleash prosperity might be for you to mail your copy of Who Needs the Fed? to your Member of Congress and tell her to get on with it. Onward to an American Economic Miracle!