Monday, April 2, 2012

James Grant on The Endless Spending Spree

Everything written by James Grant is worth reading. Therefore I direct your attention to his review of White House Burning that appeared in this past weekend's Wall Street Journal. His object of review is a book by Simon Johnson and James Kwak, who, in Grant's words, "are the resume champions of the world." They argue that our economy is in trouble because the government neither regulates nor taxes enough.

Grant demurs. He rightly traces our troubles in large part to our leaving the last semblance of the international gold standard in 1971. Grant likens this move to giving the state a "magic credit card," because it removed virtually all constraint upon government spending, because no more did the state have to rely on taxes and private lending. It could rest on borrowing funded by the Federal Reserve.

That is exactly what it did. Grant notes that
In the 10 years before 1971, the "gross" public debt (counting even those obligations held by the government itself) had climbed to $408 billion from $293 billion. This increase amounted to a compound annual rate of only 3.4%, the Great Society and the Vietnam War notwithstanding. In the next 10 years, till 1981, the gross debt jumped to $995 billion from $408 billion—a compound annual rate of 9.3%, the close of the Great Society and the end of the Vietnam War notwithstanding. Not until fiscal 2001 did the debt reach $5.8 trillion. Yet it expanded by an identical $5.8 trillion in the four short years between 2007 and 2011. Now the grand total stands at $15.6 trillion.
While Grant is not pleased with Johnson and Kwak's "wonky" policy prescriptions, it is their overall view of American economic history that really bothers him.
Some will chafe at the authors' proposals for raising the gasoline tax or reducing the mortgage-interest deduction or increasing the Medicare Part B premium. Myself, I take umbrage at their interpretation of the American past. In money and banking, and therefore in debts and deficits, the way forward is through the constructive adaptation of a history they never quite acknowledge. Here's an idea: Let's try capitalism for a change.
Grant is such a good writer and he is sound on so many things. He is right on the gold standard, correctly distinguishing between the real thing and the relatively weak gold exchange standard put in place after World War I and the even weaker Bretton Woods system which followed World War II. He is right on financial liability issues. He is right on the depression of 1920-21. As always with Grant, the entire piece is worth reading and I highly recommend it.

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