Hope Is Not a Policy

The word “denier” has had a strange political career. It began with Holocaust deniers, that execrable little group of closeted Nazis. Next, in order to libel global-warming skeptics with an echo of Holocaust denial, environmentalists began to call them “deniers” — global-warming deniers, climate deniers, etc. Now comes Forbes writer Ralph Benko with “prosperity deniers,” a group of miscreants that includes, according to Mr. Benko, your obedient servant.

At issue is a recent exchange between the great Larry Kudlow and yours truly on the issue of economic growth. Jack up economic growth, Mr. Kudlow argues, and all this budget-balancing stuff gets easier. Not so fast, says I. If we had the ability to know in advance how much growth particular economic policies would produce — or even whether they would produce growth at all — then we would never have a recession. We would always be at the sweet spot of maximum real growth. But we are limited and fallible creatures, and right-wing political macroeconomic management is no more reliable, or predictable in its outcomes, than is Keynesian political macroeconomic management. The economy is not a machine, and any time a politician says, “If we will adopt Policy X, we are sure to achieve Statistical Abstraction Y,” he is talking through his hat. The best government can do is maintain stable rules and liberal institutions and try to stay out of the way.

One can hope for growth beyond the trend line, but counting on it is something else. (And the something else it is is foolishness.)

Mr. Benko summarizes the exchange thus: “Now, the obvious if ambitious goal of bringing economic growth rates from under 2% to 5% has been charmingly attacked by NRO’s erudite Kevin Williamson as ‘magic unicorns’. This ridicule was elegantly and decisively repelled by his host, Larry Kudlow, who stated, factually and fairly, ‘I did it once, Kevin, and I can do it again.’”

My impression is that Mr. Kudlow was making a joke there. (But do watch the video and decide for yourself.)  My chief piece of evidence for that hypothesis is the fact that Mr. Kudlow is a bull, not a jackass. But if this is to be taken as an “elegant and decisive” refutation, a few facts are relevant.

If you chart the growth in real per capita GDP of the United States — the growth in economic output relative to the size of the population — you will see a remarkably straight line indicating about 2 percent real growth per year. There are ups and downs, of course, but the consistency is notable. Thanks to Jake at Econompic Data for charting it:

The period of 1929–2009 includes a great variety of economic policies without proportionally varied outcomes in the big picture. The most plausible explanation of that consistency is that, short of the Great Depression or World War II, the effects of incremental policy changes in the relatively consistent political environment of the United States are small relative to other factors affecting economic growth. Add to that the fact that the outcomes of economic policies are not known in advance or necessarily consistent over time: Nobody wanted a financial crisis or a real-estate meltdown, but we got them. We probably credit politicians too much for good economic outcomes and blame them too much for bad economic outcomes. The economy is big and complex; public finances are less so, and we could, right now, enact policies that would address the imbalances in those public finances, and do so in an orderly and largely predictable way. But that means making very unpleasant choices of the sort that are bound to be keenly unpopular with voters in New Hampshire, Iowa, Florida, etc.

Mr. Benko himself sees the same data but makes something else of it, writing: “Last week Eric Cantor produced a piece of a sure-enough path to prosperity, some of the real deal after several GOP false starts. The GOP has forfeited its credibility with us mere voters. How? Every Republican administration since Reagan has provided economic stagnation: GDP growth averaging around 2%. That is economic and political disaster. Every American has been, on average, treading water for the past decade.”

Two percent average real GDP growth is far from disaster: It doubles the national economic output every 35 years. That’s not so bad. More would be better, of course, but we can get government finances in order on 2 percent real growth. 

Mr. Cantor’s plan is based around what he calls “gazelles,” innovative early-stage startup companies. Mr. Cantor likes them because they are responsible for a disproportionate number of new jobs. So, let’s have some more gazelles, then, herds of them, which will supercharge growth and employment — and, in the process, spare Mr. Cantor and his colleagues the pain of making some very hard decisions they would really rather not make. Well, okay, fine: Let’s let the entrepreneurial geniuses in Congress put their heads together (it’ll sound like a bowling alley) and inspire a bunch of new startups. See what they come up with. After we’re done laughing, we can go back to arguing for the usual dose of regulatory liberalization, tax reductions, and fiscal prudence that Dr. GOP prescribes for every malady. (First we cut taxes, afterward we cut taxes, and next we cut taxes. Clysterium donare, postea seignare, ensuita purgare.) But here’s the thing: Fiscal prudence, deregulation, and a lighter federal hand are good things in and of themselves. Conservatives would be arguing for those if the growth rate were 1 percent, 5 percent, or 105 percent. Will they lead to 5 percent growth driven by early-stage startup firms under present economic conditions? Nobody could possibly know. (Not even the guys at Forbes!)

Don’t bet the Treasury on it.

The conservative economic arsenal is familiar enough. But Mr. Benko has a killing stroke to add, a policy proposal from the very bleeding edge of innovation: a return to the gold standard. I’d like to quote him at some length in order to give you the full flavor of his thinking:

Spending, regulatory and tax reform are necessary but not sufficient. To get to 5% we need a trustworthy monetary policy. As Kudlow suggests, there’s only one way tried, true, with Tea Party constitutional integrity: the gold standard. Avoiding it just got monumentally harder.

The second shift: Prof Robert Mundell is the ur-guru behind Reaganomics with the “Mundell-Laffer Hypothesis.” He is the father of the euro, the holder of a Nobel Prize in Economics. This writer has called him “the greatest living humanitarian since the death of Norman Borlaug.” Mundell broke silence on May 25th and issued a public endorsement of the gold standard.

On Pimm Fox’s Bloomberg Television “Taking Stock” Mundell joined his authority with Elder Statesmen Lewis E. Lehrman, Steve Forbes, Larry Kudlow, Jeffrey Bell, William Kristol and Charles Kadlec, and young turks Sean Fieler, Judy Shelton, Brian Domitrovic, John Tamny, and others — all gold standard proponents.

Breakthrough. The sound you heard? The hinge of history turning.

(Miscellany: I am not sure what an ur-guru is. It sounds like something for which you would want penicillin. And I wonder whether Professor Mundell (or anybody) still wishes to claim paternity of the euro, which is not a model of sound money at the moment. Also, there is no Nobel Prize in economics, really. It’s kind of made up. No, don’t ask me to explain it; ask Jay. But I am sure that next to his medal for the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, Professor Mundell has a brass plaque reading: “Greatest Living Humanitarian Since the Death of Norman Borlaug—Ralph Benko.”)

A return to the gold standard is unlikely. I expect to see a very large herd of magical unicorns galloping across the Third Avenue Bridge into the Bronx, kicking up rainbows in their wake, before I see the United States government choosing to return to a gold standard. And I do not think that a gold standard would solve all the problems gold-standard enthusiasts think it would. It would have economic consequences that are not predictable. But, yeah, that is the plan: unusually high growth rates and a gold standard. If that fails, maybe the Growth Fairy will leave $14.3 trillion under our pillow.

I recently got a bit grumpy about a similar argument from the George W. Bush Institute, published here, that argued, in essence: “Hey, all we have to do so solve our fiscal problems is achieve and maintain a level of growth that is substantially higher than that in our historical experience.” Okay, great: What’s Plan B? Hope is not a policy. Wishful thinking is not a substitute for mindful thinking.

It is important to work toward growth, of course, and to adopt good economic and monetary policies that we think will encourage it. (Gold standard? I would prefer privatizing the money supply.) But counting on optimistic assumptions about growth beyond current projections is, for the most part, a way to evade the very difficult business of reconciling our public income with our public spending. We have to work with what we have, with the reality before us. By all means, encourage production wherever you can, but stop trying to sell us a free lunch.

An aside . . .

I very much enjoyed this little bit of snark:

Mr. Williamson. You have succumbed to an optical illusion: mistaking gazelles for magical unicorns. Understandable. The Reagan architects of such growth did their “voodoo” when you were in grade school in Lubbock. Consistent Gazelle-like growth in the economy has been so rare that it’s easy for a youth to confuse a glimpse of a gazelle with a claim of a unicorn.

True enough: During the 1984 election, I was the lead Reagan guy for the mock-election debate in my sixth-grade class. I ambushed poor Mike D., to this very day a misguided Mondale man like his father before him. “Tell me the truth, Mike: Is your family better off than you were four years ago?” They were, so he had to answer in the affirmative. The Gipper carried the day at E. J. Parsons Elementary School, in a landslide that prefigured the actual election. (Recount Minnesota!) I failed to work in a “There you go again, Mikey.”

But Mr. Benko is entirely correct that gazelle-like growth in the economy has been quite rare — which ought to suggest that it is not so easy to achieve as Mr. Benko thinks it is. Like Reagan in ’84, I will not make age an issue in this debate, though I’ll thank Mr. Benko for pretending that I still am a “youth” and lament that his hoary locks and reverend age do not proclaim a fiscal sage.

—  Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialismpublished by Regnery. You can buy an autographed copy through National Review Online here.

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