Not quite on the money

By W. James Antle III
web posted April 2, 2001

Steve Forbes, the publisher, supply-side cheerleader, flat-taxer and occasional presidential candidate, is bullish on the United States' long-term economic growth potential and fingers two culprits for our current sluggishness: The tax burden and the Federal Reserve. So far, so good. However, in his recent National Review article "Measures Against the Malaise," he offers Alan Greenspan advice we should fervently hope he does not take.

Forbes faults the Fed for insufficient dollar creation, saying that growth in the money supply is not keeping pace with the demand. The implication is that we would not be witnessing the present slowdown if the Fed would simply print more money. Yet in fact the Federal Reserve has pumped more than $100 billion in new money into the economy since 1996 as measured by M2. The most recent figures show that the Fed has in the not so distant past been increasing the money supply by a 20 percent rate as measured by MZM.

Alan Greenspan

After pursuing a tight monetary policy from 1993 to 1995 that helped produce the consumer price stability for which Greenspan is famous, the Fed once again began boosting the money supply and creating more credit. This was first in response to criticism from Forbes and people across the political spectrum that the economy, which grew slowly following the 1993 tax-rate increase, needed lower interest rates to grow faster. Then the money supply grew in response to the so-called "Asian flu," which we were reluctant to catch and was itself the result of central-bank monetary malfeasance. Finally, in anticipation of the Y2K "bug," the Fed added excess liquidity in 1999.

Of course, people did not hoard cash in preparation for the Y2K crisis that in any event did not materialize. This liquidity found its way into the stock market, already on a wild ride due to an economy awash in newly created fiat money. The end result of all this? Wildly inflated stock prices for companies with P/E ratios of zero, credit extended to businesses with little hope of turning a profit, escalating personal and business debts, negative savings rates and an unprecedented debt-to-GDP ratio.

The Fed of course adjusted for the excess liquidity by tightening at the beginning of this year. It is true that this helped end the stock-market surge and bring the economy to the verge of contraction (Fed economists have admitted that growth is presently near zero). The dot-coms are laying people off, some $4.7 trillion has been lost in the stock market and families have seen their wealth drop $2 trillion - the first such drop in net worth in 20 years. Yet Forbes and many other normally pro-market conservatives blame the Fed only for its adjustment in tightening money, ignoring the role that easy money played in laying the groundwork for today's problems. Indeed, many of the same people who helped fight inflation 20 years ago are today counseling an inflationary policy to avoid recession.

Conservatives recognize that government subsidies for uncredit-worthy businesses and tax penalties for risk-taking and achievement are poor economic policy. Forbes himself often eloquently describes how interventionist government policies in taxation, trade, spending and regulation can distort the marketplace and hurt growth. It should be obvious that government manipulation of the money supply is just as interventionist an economic policy and it produces the same distortions in the marketplace. In a free market, the amount of credit available should equal the available savings pool. Arbitrary credit-creation by a central bank is neither a sound free-market policy nor one that can be described as pro-growth.

Excessive monetary growth debases the currency and distorts prices, whether it is consumer prices (as in the 1970s) or other prices (many stock prices in the 1990s). It causes businesses to misallocate resources as much as any ill-conceived tax policy. It extends credit to undeserving businesses in much the same way as the Small Business Administration, except on a much larger scale. The "business cycles" financial analysts work so hard to evaluate are often little more than the booms and busts generated by monetary fluctuations divorced from market reality.

Viewed along those lines, the advocacy of Steve Forbes (along with Jack Kemp, Larry Kudlow, James Glassman, Paul Gigot and many others) for more money to be pumped into the economy makes no sense. They should no more be endorsing this policy as they would Keynesian pump-priming. If one doesn't believe that the government can fine-tune the economy through fiscal and regulatory policies, it should follow that one would be skeptical of attempts to do so through monetary policy. Yet Forbes still combines his call for aggressive pro-growth tax reduction with support for more money and artificially low interest rates.

Interest rate cuts have not revived the economy so far. As Gerard Jackson of the New Australian has demonstrated, repeated interest rate cuts did not jolt the economy out of the Great Depression during the 1930s. Unemployment sometimes worsened as interest rates fell. The Bank of Japan has failed to bring the Japanese economy back with zero interest rates, although it is introducing inflationary pressures into their economy. Some Japanese economists are publicly calling for hyperinflation as the solution to their country's economic crisis. This should give pause to those in the United States who argue that anything unsolved by interest-rate cuts can be solved by bigger interest-rate cuts.

A better policy would be to couple the deep tax reduction Forbes and his compatriots call for with a sound-money policy many of them would be comfortable with: A return to the gold standard. Linking the dollar to gold would promote a stable money supply less vulnerable to inflation and deflation. Ending central-bank manipulation of the currency and making the dollar as good as gold again would definitely provide a backdrop for sustained economic growth. The Fed's primary legacy has been inflation and recession.

Free markets are only possible when government interference is kept to a minimum and money is a stable means of exchange. Central planning of the economy can never match the free market because no planners can possibly possess all the knowledge encapsulated in millions of daily economic decisions. Consistent opposition to all government management of the economy is essential if we want people to truly reap the rewards of the free market.

W. James Antle III is a former researcher for the Rhema Group, an Ohio-based political consulting firm. You can e-mail comments to

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