Originally posted on Tuesday, April 3rd, 2012
“The Road to American Prosperity Cannot be Paved with a Cheap Dollar.”
That’s the conclusion offered in an important book by Professors R. Glenn Hubbard, Dean of the Graduate School of Business at Columbia University and Peter Navarro, business professor at the University of California-Irvine: Seeds of Destruction: Why the Path to Economic Ruin Runs Through Washington, and How to Reclaim American Prosperity. Hubbard is a Republican, and, among his many distinguished accomplishments, served as chairman of President Bush’s Council of Economic Advisers and is a trusted adviser to presidential aspirant Gov. Mitt Romney. Navarro is a Democrat and a very prominent and well respected public intellectual.
Seeds of Destruction devotes its third chapter to the explaining “Why an Easy-Money Street Is a Dead End” — and provides an astute critique of how
“the Federal Reserve now is an almost total abandonment of the type of ‘rules-based’ leadership epitomized by chairmen such as Paul Volcker, who fiercely protected the Fed’s independence. Critical to our GDP Growth Drivers analysis, we also show that the Fed has played a key role in exacerbating all four major structural imbalances in our economy with its often ultra-easy money policies and excessive attempts at discretionary ‘fine-tuning.'”
Many conservative critiques of the economic disarray in which America finds itself limit themselves to familiar areas of tax and regulatory policy. It is rare enough to find policy makers who are willing to make monetary policy a central focus, rarer still to find those who are willing to advocate for a rules-based system and against cheapening the dollar. To find economists lucid enough to use a quote from country and western singer Toby Keith as the epigram — “There ain’t no right way to do the wrong thing.” —to their indictment of “Easy-Money Street” makes this a delightful, as well as significant, contribution to the discourse.
“Historically,” Hubbard and Navarro write, ” the United States has had two types of Fed chairmen, embracing very different philosophies about the proper role of the Fed in managing the economy and overseeing the financial system. One type has been embodied by chairmen such as William McChesney Martin and Paul Volcker. These Fed chairmen have fiercely protected the Fed’s independence and put the goals of price stability and sound currency ahead of political expediency and growth at any cost.”
It is important to note that the housing bubble never would have caused so much damage if the Fed had simply followed a monetary rule such as the ‘Taylor Rule,’ set forth by Stanford economist and monetarist John Taylor….”
The Gold Standard Now publicly advocates for the classical “rules of the game” that define the gold standard as the optimal monetary rule — as demonstrated empirically. While not imputing agreement with that proposition to Dean Hubbard, we salute his role in turning the conversation toward a rules-based monetary policy and away from policy that aptly can be termed “discretionary activism.”
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