Forbes Fantasies

For the past year or so, I've been receiving Forbes in the mail. I don't know why this is, but I assume someone sent me a gift subscription (can't thank whoever it is because I never found out who). And I find that it has some occasionally useful articles on various aspects of money, investing, and so forth.

But that's not why I read it. I look forward to the one-page essays near the front of each week's edition. Most of them are headlined "Thought Leaders," and they are typically quite awful, when they are not screamingly funny in their incoherence (see Schlaes, Amity). The best, though, are often those of the publisher, Steve Forbes. Today's text is his October 22 piece, "Gold Can Save Us From Disaster."

Steve's argument is that stable currency is the answer to our prayers, economically speaking, and a return to the gold standard would produce the desired stability. Here is his complaint: "An unstable dollar is wreaking havoc on our capital markets, depriving us of money for productive enterprises and future enterprises while subsidizing government debt on a scale never before seen in U.S. history." I'd like to examine that claim.

First, is our dollar unstable?

By coincidence, this piece in the Atlantic online from just last August makes the point that price stability under the gold standard is not necessarily better than under a fiat money standard. In general terms, price stability is a desirable goal, because it allows for predictability in the markets. But it is not necessarily the primary goal of economic policy.

Second, does an unstable dollar "wreak havoc" on our capital markets?

This article from the archives of the Federal Reserve provides fascinating real-world instances of how the requirement to maintain the gold standard, in the face of external pressures, threatened the capital markets --the NYSE itself was closed for four months in 1914 as a direct result of the need to maintain the gold standard; I wonder what Mr. Forbes would have to say about that sort of event. By contrast, the capital markets in the US, whether you look at stock prices and trading volumes or market rates of interest,  currently seem to be functioning well.

Third, are we "deprived of money for productive enterprises and future enterprises" (an awkward pairing; not sure what, if anything, Forbes is getting at here)?

Well, I guess that comes down to a question of who is being "deprived." Given the historic amount of cash in the coffers of American business (see here and here), it is tough to say that businesses don't have money to invest in "productive enterprises or future enterprises." So I suppose we ought to assume that the "we" actually means what it says, that is, Mr. Forbes himself, and others like him. I suspect, in other words, that he is lamenting the historically low level of interest rates, which, he says at another point in his article, punishes savers (or the wealthy in general).

Fourth, is government debt being subsidized "on a scale never before seen in U.S. history?"

Again, it's a little hard to understand what he means by this. I expect that the "subsidy" he refers to is simply the fact that, because interest rates are so low, the government can finance its historically high level of debt at a cost in annual interest that is lower than the total paid in any year during the G.W Bush administration. In other words, the cost to the taxpayer of current government borrowing is less than at almost any time in our history --which, in other circumstances, would be regarded by Mr. Forbes as a good thing (at least, to the extent that he would regard higher costs, in general, to the taxpayer as being a bad thing, which would depend on whether he really cares about "the taxpayer"). So the government is not as constrained in its borrowing as he would wish --for reasons having little to do with the overall state of the economy. Presumably, Mr. Forbes would want the government to be paying much, much more for the money it borrows. Lenders usually do.

Now, it is certainly true that, if we were on the gold standard, interest rates would be much higher: because the supply of gold is fixed, more or less, the government could not print money; and therefore the money already in circulation, backed by gold reserves, would be much harder to come by and so would cost more. And that would be good for lenders. But it would be very bad for borrowers; and borrowers are by far the majority of the people, and certainly are the portion of the population currently most in need. Also, at a time when expanded economic activity may be needed, say, to stave off recession or depression, the government, or the central bank, would not, on a gold standard, have the flexibility needed to pump money into the economy and so increase economic activity; the result would be an inability to put any brake on economic contraction of the sort we have experienced in recent years.

It seems to me that Mr. Forbes is actually (whether he knows it or not) lamenting the lack of deflation in the economy. Deflation is what we could expect if we were on the gold standard; and deflation would suit a lender just fine: it would mean that he'd be getting paid back in ever more valuable dollars. And inflation, on the other hand, is what Mr. Forbes fears; like a great many other conservatives, he appears to ignore the facts of the past 5 years and continue to expect runaway inflation any day now, just as has been predicted, over and over, for 5 years, by his ideological compatriots.

It is worth noting that, in a Chicago survey of 40 economists at the top economics departments in the U.S. academy, all of them (except for a few non-respondents) registered a "disagree" or a "strongly disagree" to the assertion, "If the US replaced its discretionary monetary policy regime with a gold standard, defining a "dollar" as a specific number of ounces of gold, the price-stability and employment outcomes would be better for the average American."

Comments from the 40 economists range from the measured "A time series plot of the price of consumption in ounces of gold, and then in US dollars, clarifies that gold is not a stable standard." to  "A gold standard regime would be a disaster for any large advanced economy. Love of the G.S. implies macroeconomic illiteracy."  to "eesh. Has it come to this?"  

Mr. Forbes, it ought to be noted, joined the magazine that bears his name (and that of his father, and his grandfather who founded Forbes) soon after his graduation from Princeton in 1971, and has never worked anywhere else.  So it should come as no surprise that his exposure to the real world, as opposed to the cloistered precincts of old money, has been minimal and awkwardly-pursued (according to his Wikipedia biography, Time magazine called Forbes's abortive 1996 campaign for the Republican presidential nomination a"comedy-club impression of what would happen if some mad scientist decided to construct a dork robot." and also described his campaign as "wacky, saturated with money and ultimately embarrassing to all concerned." But his think pieces in his family's rag, even ignoring his confident "yes, he [Romney] will win this election, despite all the claptrap to the contrary" in the article under discussion here, are noteworthy: pomposity can be easily satirized; but when it is so spectacularly ill-informed, it satirizes itself.