It was fifty years ago that a young assistant professor named Leland Yeager organized a series of lectures meeting at the University of Virginia in Charlottesville. The topic was money – oddly enough a neglected topic in university economics in those days. Eleven authors, including Milton Friedman, James Buchanan, Jacob Viner, Benjamin Graham and Murray Rothbard, described how the basic character of a monetary system might be shaped from, as it were, the ground up.
Fractional central banking? Or one hundred percent reserves? A commodity standard? A gold standard? Free banking? Open market operations to steady the price level? Rules? Discretion? Independence? Or political control? Their lectures, with an introduction by Yeager, were published in 1962 by Harvard University Press as In Search of a Monetary Constitution. In the ensuing decades of high inflation, the book became something of a modern classic, anticipating many of the abstruse debates to come in accessible literary form.
Last week, Yeager spoke as part of a panel at the Summer Institute for the Preservation of the Study of the History of Economics at the University of Richmond on the US response to the economic situation. He wasn’t sanguine.
“Although a short-run consequence of the overspending-fueled boom and its collapse, this deficiency [of demand] is what politicians emphasize as they call for economic stimulus…. The supposed remedy increases the burden of the national debt and worsens the danger of money-supply and price inflation.”
Still less sanguine was Buchanan, who also spoke. The Keynesian revolution in the middle third of the twentieth century had produced a solid advance in economic understanding, Buchanan said, teaching people to think about aggregate economics in terms of the measurements by which the economy today is understood – national product, income, rates of growth and so on. But no comparable advance has occurred since.
Now the panic of 2008 has precipitated a threat to the monetary system more serious than any other, Buchanan said; the temptation to inflate away the burden of the national debt by printing money may prove irresistible. He recalled his proposal of 1962 for a commodity standard based on the money price of a common building brick (a notion proposed years before by C.O. Hardy, an expert on monetary affairs between the wars, but never published). “The Federal Reserve Board has no incentive to economize on something that costs nothing to produce,” he said. The whole central bank idea has “no constitutional basis, however.”
There is another possibility – that the commitment to an informal monetary constitution has actually become stronger in the last thirty years, not weaker. At one point in the discussion, Michal Lehuta, a young Slovak analyst, piped up, “But haven’t we basically got just that that? With inflation targeting? And independent central banks?”
Maybe. It ‘s possible, after all. The hard-won battles against high inflation rates of the 1970s gave way in the 1990s to a great deal of self-congratulation. “The Great Moderation” of the twenty-five years after 1982 was born of a new appreciation of the importance of relatively stable money, and of an enhanced understanding of the tools by which central banks had brought it about.
If only a little of that turns out to be true – if monetary policy proves to be adequate to ending the current recession without producing a divisive and demoralizing burst of inflation – then the “credibility revolution” of the last thirty years may turn out to be another intellectual advance of the first magnitude in economics.
It cannot happen, though, unless the first tentative steps are taken towards the creation of an informal fiscal constitution – a widely-shared and broadly-measurable consensus about how the goods and services of the economy as a whole are to be spent in the coming decades, collectively and privately, which is the only way of insuring that those choices are compatible with monetary stability.
On the surface of it, that is no more complicated than balancing the budget – so much harder than it sounds because so much of the national debt, in the form of commitments to Social Security and medical care, is omitted from the official measures. No wonder, then, that back-of-the-envelope calculations abound to show it simply can’t be done – that the US has no choice other than – at best – a short burst of inflation, rather like (in golfer’s parlance) a wedge shot from a bunker onto the green.
There is nothing simple about the diaphanous idea of a fiscal constitution, that’s for sure. A start was made in the 1990s with global spending caps and various “pay-go” provisions requiring Congress to identify and authorize revenue streams to pay for any and all spending programs. Matters get more complicated when the near-term rate of growth may be affected. Could the sudden imposition of a cap-and-trade system for limiting greenhouse-gas emissions slow the economic recovery? Perhaps, but that doesn’t mean a modest program is a bad idea. Things become even more difficult to gauge when long-term growth rates are involved.
Would the creation of a new healthcare system be expensive? Certainly. But what if it succeeded in slowing the rate of increase in the cost of healthcare even a little? Then it might actually begin to trim the overall deficit faced by those off-balance-sheet Federal spending programs, Social Security and Medicare, in the years to come – a tax increase that wouldpay for itself.
“The last thing the US needs is to be viewed as one giant California, rich but unwilling to pay enough taxes to fund the services its citizens demand,” Harvard’s Kenneth Rogoff wrote in the Financial Times last week And, indeed, a sharp increase in healthcare taxes might raise doubts about government’s willingness to make good on its other commitments.
So some combination of higher taxes and diminished entitlement claims in the years again ahead – none of the losses such as to cause great pain among the generation of the Baby Boom, which must, by simple arithmetic, bear the greatest cost – might trigger a virtuous circle of steady growth and stable money for decades ahead. This is the province of a fiscal constitution — an overall set of rules by which the nation’s commitments to taxing and spending are to be arranged.
If the past is any guide, somewhere there is a group working on it in relative harmony, with high seriousness of purpose, just as fifty years ago a group at the University of Virginia was laying some part of the groundwork for the present day.