March 19, 2019
In my last few columns, I have been writing about events from 50 or 100 years ago, saying that things aren’t quite so bad now as they were then. You don’t have to go back to the 1860s Civil War to find more fractious times in America. The scary press, radical environmentalism, paranoid Presidents, domestic terrorists, and political polarities were just as bad or worse then. Let me take a short look now at the war of words between the Chairman of the Federal Reserve (now Jerome Powell) and the President (now Donald Trump), something that reached what the press characterized as approaching Defcon-1 last December.
Consider the war between the Fed chair and President 55 years ago: 1964 (like 2017) was a dream year for bulls, as everyone’s taxes were cut (as recently), the U.S. was asserting itself at Tonkin Gulf (“Don’t tread on us!”), and in November President Lyndon Johnson was elected in his own right in the biggest one-party sweep in history: The House was 295-140 Democratic and the Senate was 66-34 True Blue.
But on June 1, 1965, Fed Chairman William McChesney Martin – who had been in that office since 1951 and who was famous for saying that his job was to “take away the punch bowl just as the party gets going” did just that. In his principal address to the Alumni Federation at a Commencement Day luncheon at Columbia University, he said that he saw “disquieting similarities between our present prosperity and the fabulous 1920s.” He recited a recurring mantra of “then, as now” comparisons, including the fact that “many government officials, scholars, and businessmen were convinced that a new economic era had opened, an era in which business fluctuations had become a thing of the past.” He said, “Some experts” (the President’s advisors?) “seem resolved to ignore the lessons of the past.” He turned Biblical, saying that “then as now” there had been seven fat years of uninterrupted economic progress…. Prosperity was unequally concentrated…domestic debt was soaring” (source: “Once in Golconda” by John Brooks).
In the midst of this bullish nirvana (1964-65), according to a 2018 book by former Fed Chairman Alan Greenspan and The Economist political editor Adrian Wooldridge (“Capitalism in America”), President Lyndon Johnson had “pushed his New Frontier economic policies to extremes, as if producing economic growth was a sheer matter of will and determination. In 1964, he bullied the Federal Reserve into keeping interest rates as low as possible at the same time as delivering a powerful fiscal stimulus by signing tax cuts into law. When William McChesney Martin, the chairman of the Fed, demurred, Johnson invited him to his Texas ranch and gave him the once-over, shoving him around the room, yelling in his face,
According to a New York Times report on that meeting, based on several sources present, Johnson told Martin, “You took advantage of me and I’m not going to forget it, because here I am, a sick man. You’ve got me into a position where you can run a rapier into me, and you’ve run it. Martin, my boys are dying in Vietnam, and you won’t print the money I need.” Wow! And you thought Trump’s tweets were cheeky?!
Can you imagine such a war of words and physical shoving going on between President Trump and Fed chairman Powell today? I can’t. Things were indeed further out of had 55 years ago than they are today.
“How Are We Ever Going to SPEND All This Money?”
Part of the hubris of the 1960-74 imperial Presidencies (JFK, LBJ, Nixon) is that they each hired an army of Keynesian economists – disciples of the late British economist John Maynard Keynes – to run their Council of Economic Advisors. According to Greenspan and Woolridge (in “Capitalism in America”), those advisors told them that “the biggest problem facing the country was that the Treasury was raising too much money. The large federal surplus would act as a deflationary brake on economic growth … and the government needed to find ways of spending money. Predictably, there was no shortage of ideas for doing the spending: the 1964 tax cut, a program to put a man on the moon, and… lots of social spending.”
After the JFK assassination, LBJ doubled down, adding a huge array of new Great Society entitlements – Medicare, Medicaid, additions to Social Security, Aid to Families with Dependent Children (AFDC), a war on poverty, public TV and radio (plus escalating Vietnam costs). “Hell,” he said, “I’m sick of all the people who talk about the things we can’t do. We’re the richest country in the world. We can do it all.”
Then, President Nixon “presided over an even bigger expansion of the entitlement state than LBJ,” according to Greenspan and Wooldridge. Nixon’s entitlement expenditures grew 20% faster than LBJ’s.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
At first, it seemed to work. By 1973, the nation’s real income was 70% higher than it was in 1961. Magic! In the middle of that 12-year expansion, a top census official said that America’s most pressing problem would be how to consume all the wealth it was producing: “A continuation of recent trends will carry us to unbelievable levels of economic activity in our own lifetimes.” (Are you tired of winning yet?)
Then came the ignominious end of the Vietnam War, Watergate, domestic unrest, the OPEC oil embargo, gas lines, and deep questions about who we are and what we stand for as a nation. As the government attempted to do more and more for us, the citizenry seemed to respect government less. The percentage of Americans who said they “trust the American government” fell from 75% in 1965 to 25% in the late ‘70s.
And now we come full circle to a gaggle of Democratic Presidential hopefuls promising to spend up to $93 trillion in a New Green Deal, including Medicare for All, with Free Education and Guaranteed Jobs!
“Hell, we’re the richest nation in the world, why not?” Increasingly, their response is Modern Monetary Theory (MMT). Economist Stephanie Kelton, a Bernie Sanders acolyte, argues that governments like the United States can borrow in their own currencies, because we’ll never run out of money, since money, like bonds issued to finance federal deficits, is actually a government promise, not a physical commodity.
Older, wiser economists beg to differ. Larry Summers, economist, professor, former advisor to Presidents Clinton and Obama, told CNBC last week that applying MMT to finance Medicare-for-all or a Green New Deal is dangerous. He said: “Countries all over South America have tried it with disastrous results.”
Fed Chair Jerome Powell was asked about MMT during his semiannual report to Congress. He said: “The idea that deficits don’t matter for countries that can borrow in their own currencies, I think is just wrong.”
MMT proponents also ignore the reality of bond markets. Investors demand high interest rates from governments with high debts and rising borrowing needs. The U.S. national debt is fairly high compared with GDP and is growing faster than the economy. Adopting MMT would surely scare investors and result in much higher interest rates. Rising interest costs would absorb money that was supposed to pay for the free stuff. Obviously, that would result in a financial crisis. The value of the dollar would decline, and inflation would rise. Larry Summers pointed out that MMT-like policies were tried and reversed in the early 1980s in France and the late 1990s in Germany. MMT cannot work. It’s like monetary alchemy.
The Keynesian whiz-kids were wrong in the 1960s, and the MMT knuckleheads are even crazier today.