Thursday, October 11, 2012
In a time of ferment, even economic policy makers, even central bankers need rules. Otherwise, they make them up. Rules on the fly any substitute for rules. Pleasing people in the short-term is too tempting; satisfying them for the long-term too ethereal.
Discipline is needed but often in short supply. In a paper presented to the 29th Annual Cato Monetary Conference in November, 2011, economists Kevin Dowd, Martin Hutchinson and Gordon Kerr observed: “A gold standard would impose a much needed discipline on the issue of currency and on attempts to manipulate interest rates. A gold standard is not without its flaws, but is vastly better than the unmanageable fiat system that replaced it. The gold standard has a very creditable historical track record in delivering longer-term price stability... and that fears of the damaging effects of deflation are much exaggerated – that is, the deflation ‘problem’ is largely a bugaboo fed by misinterpretations of the 1930s and the earlier depression that lasted from the 1870s to the mid-1890s.”
Donald Rumsfeld famously had a set of rules for working at the White House. Some apply to the current economic situation:
- It’s easier to get into something than to get out of it.
- Learn to say I don’t know. If used when appropriate, it will be often.
- Beware when any idea is promoted primarily because it is ‘bold, exciting, innovative and new.” There are many ideas that are “bold, exciting, innovative and new,” but also foolish.
The Rubin Doctrine of International Finance was half-seriously summarized by the subordinates of former Treasury Robert Rubin :
- The only certainty in life is that nothing is ever certain.
- Markets are good, but they are not the solution to all problems.
- The credibility and the quality of a nation’s policies matter more for its prospects than anything the United States, the G-7, or the international financial institutions can do.
- Money is no substitute for strong policy, but there are times when it is more costly to provide too little money than to provide too much.
- Borrowers must bear the consequences of the debts they incur – and creditors of the lending they provide.
- The United States must be willing to be defined by what it is against, as well as what it is for.
- The dollar is too important to be sued as an instrument of trade policy.
- Optionality is good in itself.
- Never let your rhetoric commit you to something you cannot deliver.
- Gimmicks are no substitute for serious analysis and care in decision making.
Everyone needs rules to operate effectively. Rules give credibility to any system. Money needs credibility – and it cannot come simply from banks, Federal Reserve System, or other central banks. Credibility comes from the rule of the gold standard.