“It is not enough to be against something; you have to tell people what you are for.” — Jack Kemp
My mentor Jack Kemp was not just another political leader or public official. His impact on the nation’s prosperity and well-being was out of all proportion to the positions he held in government and all the more astonishing for his never having attained the Presidency to which he aspired.
There are two ideas in particular about which Jack was an impassioned advocate: pro-growth tax cuts, and sound and honest money.
The first idea was to establish a national fiscal policy based on a broad-based reduction in tax rates in order to create incentives for business and job creation in a slow economy. For years he was a voice in the congressional wilderness, tirelessly pitching his deep income tax cut proposal to uncomprehending colleagues. It is easy to forget that Jack’s “supply side” gospel was met with the ridicule and scorn of conventional experts who lacked his economic imagination. They could not grasp how lowering tax rates on individuals would increase incentives and boost economic activity.
In a sense Jack was prophesying to an audience of one: the comprehending, imaginative, and unconventional Ronald Reagan. The Republican candidate for President in 1980 was convinced that Kemp was right. He saw that the policy of increasing after-tax rewards for entrepreneurship and job expansion could be a key factor in reviving a stagnant economy. President Reagan first carried the case for across-the-board tax cuts to the American people in the election, and then to Congress to enact what became known simply as Kemp-Roth. The long economic expansion that began soon afterward confounded Jack’s critics and reduced opponents to stunned or sullen silence. Today supply-side fiscal policy is still considered a reasonable approach to the problems of stagnant economies.
Kemp also understood that sound and stable money was an important precondition for sustainable, long-run growth. Jack believed that since President Nixon ended the Bretton Woods international monetary arrangement which had linked the dollar to the world gold price, the Fed’s experimentation with fiat currency had resulted in periodic bouts of inflation and deflation, creating an unnecessary barrier to long term expansion of the national economy and international trade.
On May 17, 1983 Kemp and Professor Robert Mundell convened an international monetary conference in Washington, featuring a high-powered group of US officials and world renowned economists. The central issue was the need for international monetary reform, including the topics of fixed versus floating exchange rates and dollar stability. In his concluding summary, Jack said:
We have a short-run problem and a long-run problem. The short-run problem is how to bring about economic recovery and reduce unemployment and restore the credit worthiness of the borrowing countries. The long run problem is how to sustain the recovery without a return to yet another deadly cycle of inflation, high interest rates, and ultimately, another major recession. Professor Mundell warns that recovery will be choked off unless we can reform the monetary system in a way which restores confidence in the world’s money.
In the years that have gone by since, our monetary experiences have varied. At times when the Fed apparently practiced a rule-based monetary policy, the US and global economies grew with low inflation. When such implicit rules were abandoned, the economy of this nation and many others fell off course.
Since the late 1970s, when Congress endangered the Fed’s independence by tasking it with a dual mission of promoting “maximum employment,” in addition to maintaining stable prices, the Fed has struggled to steer a middle course between inconsistent goals. Kemp often referred to the Phillips curve, according to which there is a trade-off between inflation and unemployment: the lower the one, the higher the other. The Fed’s dual mandate implicitly rests on Phillips curve thinking—the Keynesian monetary approach which Kemp largely blamed for the economic conundrum of President Jimmy Carter, when both unemployment and inflation were rising at the same time.
Both aspects of the Fed’s dual mandate are obviously central and critical to our expectations from modern government. But monetary policy itself cannot simultaneously meet both goals, nor can it do the job of sustaining a full employment economy. That is the proper task of fiscal policy. Jack believed that the Fed should have a single mandate: to maintain price stability, ensuring that the nation’s money remained sound over time. A dollar whose value is stable and secure by virtue of Fed policy is the necessary condition for job creation and solid growth. The sufficient condition is a pro-growth fiscal policy of low taxes and spending restraint, for which Congress is solely responsible – plus a regulatory regime that does not create barriers to entrepreneurial expansion, for which the legislative branch is ultimately responsible as well.
Unlike the Kemp-Roth 33% across-the-board tax rate cut proposal, Jack never promoted one specific plan for returning the country to rule-based monetary policy. He did, however, concentrate increasingly on the international monetary system, favoring a Bretton Woods-style format that would incorporate the market price of gold into the Fed’s decisions to expand or reduce the money supply. He sometimes suggested utilizing a “basket” or index of commodities, including precious metals, to serve as a surrogate price index. He believed that a dollar whose long-term value would be stabilized and secured by some linkage to gold would resume its place as the currency leader of the world, and would be followed by other nations under formal agreements or informal practice. In effect this would stabilize world currencies and open up vast new possibilities for expanding international trade and worldwide economic growth. Aware of the close relationship between economic and political issues, Jack expected that the potential for global economic growth would in turn encourage movements in oppressed nations against tyranny and for democracy as well as enhance prospects for peace.
As I write, the Fed has begun its latest monetary experiment in “quantitative easing,” pumping another $600 billion into the world’s dollar reserve glut in an effort to depress bond and interest rates even further and restart job creation in the US. The current Fed chairman claims he is acting on evidence of disinflation to avert the possibility of deflation. Backward-looking indices such as the consumer price index (CPI) are not yet showing that inflation has reached two percent, so the Fed feels justified in deluging the world with dollars, ignoring leading indicators of inflation such as gold and commodity prices, which have risen rapidly in anticipation of future inflation. The Fed’s decision to ignore commodity inflation has real consequences for real people. Rising oil prices increase the cost of the fuel people need to get to work. Rising cotton prices increase the price they pay for their children’s clothing. It all adds up to a lower standard of living for many Americans – and the Fed’s latest actions are only making things worse.
While I do not share his specific policy prescription for a return to the gold standard, Kemp’s “voice in the wilderness” on dollar stability and gold is not as lonely now as when he first raised it in the 1970s. America’s economic experiences, good and bad, of the last 30 to 40 years have brought new and surprising attention to Jack’s unfinished monetary agenda. Alan Greenspan, former Fed chairman, recently said: “Gold is the canary in the coal mine. It signals problems with respect to currency markets. Central banks should pay attention to it.” The current President of the World Bank, Robert Zoellick, is calling for an international currency system possibly involving the dollar, euro, yen, pound and yuan. His recent article in Financial Times, echoing Kemp’s ongoing challenge over his career, argued that gold could become an “international reference point of market expectations about inflation, deflation and future currency values.” In one form or another, world leaders from President Sarkozy of France and the EU to Prime Minister Mahathir of Malaysia have voiced growing interest in international or regional arrangements relating currencies to the value of gold.
It was my privilege to have worked with Jack at Empower America in the mid-1990s. His passion for price stability as the proper goal of monetary policy never faded after he left office. I have introduced legislation to eliminate the Fed’s self-contradictory “dual mandate” and refocus monetary policy on the single mandate of price stability. I will reintroduce this proposal in the new Congress that meets in January 2011.
Many European governments are now wracked with the harsh consequences of decades of reckless big government spending programs and are now being forced to impose unpopular austerity measures while looking for ways to open their markets to free enterprise and competition. There is a rapidly approaching debt crisis in the US as well, but these consequences can still be avoided if Congress reasserts its fiscal responsibilities to reform our national entitlement programs to safeguard their security, and reorder the individual and business tax code to promote job growth and prosperity.
Both the national economies now in trouble, and the US in its effort to avoid their fate, could be helped immensely by the re-establishment of an international regime of sound and stable currencies. Jack Kemp developed a gold mine of principles and proposals to address this very problem. The US – as well as the world’s monetary order – could not be better served than to reconsider his prophetic insistence that prosperity must begin with sound and honest money.
(Congressman Ryan (R-Wisconsin) is the Chairman of the House Budget Committee.)