The Accidental Theorist (6 page)

This is why: The study tracked a number of people who had paid income taxes in each of the years from 1979 to 1988. Since only about half the working population actually paid taxes over the entire period, this meant that the study was already biased toward tracking the relatively successful. And these earners were then compared to
the population at large
. So the study showed that in 1979, 28 percent of this studied population was in the bottom 20 percent of the whole population; by 1988 that figure was only 7 percent.

This means, Armey asserts, that someone in the lowest quintile would be more likely to move to the highest than stay in place. Put kindly, it’s a silly argument. For subjects of the study who moved from the bottom to the top, the typical age in 1979 was only 22. “This isn’t your classic income mobility,” Kevin Murphy of the University of Chicago remarked at the time. “This is the guy who works in the college bookstore and has a real job by the time he is in his early thirties.”

In reality, moves from the bottom to the top quintile are extremely rare; a typical estimate is that only about 3 percent of families who are in the bottom 20 percent in one year will be in the top 20 percent a decade later. About half will still be in the bottom quintile. And even those 3 percent that move aren’t necessarily Horatio Alger stories. The top quintile includes everyone from a $60,000 a year regional manager to Warren Buffett.

Armey is no fool. He cannot be unaware that he is fudging his numbers. Possibly he regards a small fib as justifiable in the service of a higher truth. Or possibly he has managed to achieve a state of doublethink, in which the distinction between what is politically convenient to believe and the objective facts no longer exists. The end result is the same: His book is an effort to obscure the stark realities of growing inequality.

And that is no surprise. After all, the success of free-market conservatives in seizing the mantle of populism in America, despite the growing gap between the broad public and a small minority possessing astonishing wealth, is inherently vulnerable. It took a combination of brilliant political leadership on the right and an awesome mixture of political ineptitude, personal arrogance, and cultural elitism on the part of liberals to give Armey and their allies their current position of power. (I sometimes think that Renaissance Weekend killed the Clinton administration.)

But despite the triumph of 1994, there is always the risk that someone will point out that there are now quite a few men in America who each make more money every year than the entire House of Representatives, and that it is these men who will be the most conspicuous beneficiaries of the new majority’s politics.

As far as Armey and his allies are concerned, the answer to this risk is simple: The public must not know how well the rich have done compared with the rest. If a new study points out just how much income and wealth have become concentrated, deploy the forces of the conservative media to attack the data with every spurious argument imaginable. There are always plenty of places to publish such attacks and people to write them because the rich are different from you and me: They have (a lot) more money. In particular, they own magazines and newspapers, and readily support think tanks staffed with people whose job, whatever its formal description, is to support the interests of their donors. As H. L. Mencken once pointed out, it is difficult to get a man to understand something when his income depends on his not understanding it.

The uneasy politics of free-market populism are also probably a major reason why the Republican majority in Congress seems determined to mount an assault on economic analysis in general—not only to eliminate the President’s Council of Economic Advisers, but to eliminate all National Science Foundation funding for the field, and to slash the budget of the Bureau of Economic Analysis (which provides the basic data on national income).

The irony is that much of this research provides support for Republican free-market ideology. But the motivation for cutting the funding is easy enough to understand: If your doctrine depends on a view of the economy that is flatly contradicted by reality, then the fewer facts, the better.

Edward Wolff has written a good book, while Richard Armey has written a terrible one. The real message, however, comes from the contrast between them—between the mildly liberal economics professor who is disturbed by the trends in our society and would like to make a small effort to ameliorate them, and the tough-talking conservative who is determined to deny the reality of these trends and to smash anyone who reports on them. May the better man win.

“You now work from the first of January to May just to pay your taxes so that the party of government can satisfy its priorities with the sweat of your brow because they think that what you would do with your own money would be morally and practically less admirable than what they would do with it…. Somewhere, a grandmother couldn’t afford to call her granddaughter, or a child went without a book, or a family couldn’t afford that first home because there was just not enough money…. Why? Because some genius in the Clinton administration took the money to fund yet another theory, yet another program, and yet another bureaucracy.” The words are Bob Dole’s (actually, they’re Mark Helprin’s, but Dole said them after accepting the Republican presidential nomination). They are the key to understanding why the Republican Revolution, which seemed so unstoppable at the beginning of 1995, ground to a halt within a year.

Dole’s speech tried to put over, one more time, the fiction that the federal government takes away your hard-earned money and spends most of it on things that only social workers want. Supply-side economics, with its promise that tax cuts would pay for themselves, may have given conservatives the courage to be irresponsible. But what sold the public on conservatism was the images of vast armies of bureaucrats and of welfare queens driving Cadillacs. Conservatives were able to get away with such stories for one main reason: They could always blame their failure to slay Big Government on the Democrats who controlled Congress. Then they suddenly found themselves in control—and the fig leaf was gone. Some on the right attribute their troubles to mere tactical failures; if only Dole had been a better campaigner, if only Clinton hadn’t shamelessly veered right, if only Gingrich hadn’t thrown a tantrum on Air Force One, the conservative wave would have rolled on. And they insist that their defeats were only temporary setbacks. But the truth is that the political appeal of radical conservatism has always been based on a fundamentally untrue vision of what the federal government is and does.

To get an idea of the gap between conservative mythology and reality, let’s look at the best book published in America. It’s called
The Statistical Abstract of the United States
, and if more people would get into the habit of checking it, our politics would be utterly transformed. The
Statistical Abstract
makes it quite easy to get a realistic picture of where your tax dollar goes. For example, here is a list of ten major federal programs. The number after the colon indicates each program’s percentage of fiscal 1994 spending:

There are three important things to say about this list. The first is that it encompasses the bulk of government spending—82.2 percent, to be precise. Anyone who proposes a radical downsizing of the federal government must mean to slash this list. The second is that with one possible exception, these are programs that the public likes—they are not at all what people object to when they rail against Big Government. We believe in honoring our debts. We like our strong military; indeed, most conservatives want it stronger. We like our highways. We want strong law enforcement. The only possibly unpopular item on the list is Medicaid, which is the only “poverty” program. But Medicaid is increasingly a program of aid not for the poor per se, but rather, for the old. More and more of it pays for nursing-home care—and many of those patients have middle-class children.

And that brings us to the third point: Aside from defense and interest payments, the U.S. government is now mainly—yes, mainly—in the business of taxing the young and giving money to the old. Look at that list, and consider how utterly shameless Dole was in imagining a grandmother who couldn’t afford to call her granddaughter because she pays too much in taxes. That grandmother almost surely lives better than people of her age ever lived before, supported by Social Security checks that will greatly exceed the value of the contributions she and her husband paid into the system. And her children could easily have sent her the money for phone calls, except that their Medicare contributions had to cover her hip replacement.

There is a good case to be made that America’s gerontocracy has gone too far, that we are too generous to our retirees, especially to those who could afford to do without some of those benefits. But that is not a case the right has ever made. An honest advocate of smaller government would campaign not against elitist bureaucrats but against nice middle-class retirees in their Florida condominiums. Somehow, that wasn’t in Dole’s speech.

It isn’t as easy to summarize federal regulation as it is to summarize federal spending, but the basic point is similar: Most of what the government does is actually serving, not opposing, the public’s will. Lots of people snicker at snail-darter jokes, but only a small minority wants to see a repeal of the clean-air or clean-water laws. And the voters are prepared to punish those politicians whom they suspect of belonging to that minority.

Of course, the federal government wastes a lot of money; so does the private sector (have you read “Dilbert” lately?). But the kind of oppressive government, run by meddling elitists, that Bob Dole tried to tell us about in San Diego exists only in the conservative imagination. And that is why Gingrich and Dole did not snatch defeat from the jaws of victory. Their reversal of fortune was preordained, because their doctrine could not withstand the responsibility that came with success.

The legend of King Midas has been generally misunderstood. Most people think the curse that turned everything the old miser touched into gold, leaving him unable to eat or drink, was a lesson in the perils of avarice. But Midas’s true sin was his failure to understand monetary economics. What the gods were really telling him is that gold is just a metal. If it sometimes seems to be more, that is only because society has found it convenient to use gold as a medium of exchange—a bridge between other, truly desirable, objects. There are other possible mediums of exchange, and it is silly to imagine that this pretty, but only moderately useful, substance has some irreplaceable significance.

But there are many people—nearly all of them ardent conservatives—who reject that lesson. While Jack Kemp, Steve Forbes, and
Wall Street Journal
editor Robert Bartley are best known for their promotion of supply-side economics, they are equally dedicated to the belief that the key to prosperity is a return to the gold standard, which John Maynard Keynes pronounced a “barbarous relic” more than sixty years ago. With any luck, these latter-day Midases will never lay a finger on actual monetary policy. Nonetheless, these are influential people—they are one of the factions now struggling for the Republican party’s soul—and the passionate arguments they make for a gold standard are a useful window on how they think.

There
is
a case to be made for a return to the gold standard. It is not a very good case, and most sensible economists reject it, but the idea is not completely crazy. On the other hand, the ideas of our modern gold bugs
are
completely crazy. Their belief in gold is, it turns out, not pragmatic but mystical.

The current world monetary system assigns no special role to gold; indeed, the Federal Reserve is not obliged to tie the dollar to anything. It can print as much or as little money as it deems appropriate. There are powerful advantages to such an unconstrained system. Above all, the Fed is free to respond to actual or threatened recessions by pumping in money. To take only one example, that flexibility is the reason the stock market crash of 1987—which started out every bit as frightening as that of 1929—did not cause a slump in the real economy.

While a freely floating national money has advantages, however, it also has risks. For one thing, it can create uncertainties for international traders and investors. Over the past five years, the dollar has been worth as much as 120 yen and as little as 80. The costs of this volatility are hard to measure (partly because sophisticated financial markets allow businesses to hedge much of that risk), but they must be significant. Furthermore, a system that leaves monetary managers free to do good also leaves them free to be irresponsible—and, in some countries, they have been quick to take the opportunity. That is why countries with a history of runaway inflation, like Argentina, often come to the conclusion that monetary independence is a poisoned chalice. (Argentine law now requires that one peso be worth exactly one U.S. dollar, and that every peso in circulation be backed by a dollar in reserves.)

So, there is no obvious answer to the question of whether or not to tie a nation’s currency to some external standard. By establishing a fixed rate of exchange between currencies—or even adopting a common currency—nations can eliminate the uncertainties of fluctuating exchange rates; and a country with a history of irresponsible policies may be able to gain credibility by association. (The Italian government wants to join a European Monetary Union largely because it hopes to refinance its massive debts at German interest rates.) On the other hand, what happens if two nations have joined their currencies, and one finds itself experiencing an inflationary boom while the other is in a deflationary recession? (This is exactly what happened to Europe in the early 1990s, when western Germany boomed while the rest of Europe slid into double-digit unemployment.) Then the monetary policy that is appropriate for one is exactly wrong for the other. These ambiguities explain why economists are divided over the wisdom of Europe’s attempt to create a common currency. I personally think that it will lead, on average, to somewhat higher European unemployment rates; but many sensible economists disagree.

So where does gold enter the picture? While some modern nations have chosen, with reasonable justification, to renounce their monetary autonomy in favor of some external standard, the standard they choose these days is always the currency of another, presumably more responsible, nation. Argentina seeks salvation from the dollar; Italy from the deutsche mark. But the men and women who run the Fed, and even those who run the German Bundesbank, are mere mortals, who may yet succumb to the temptations of the printing press. Why not ensure monetary virtue by trusting not in the wisdom of men but in an objective standard? Why not emulate our great-grandfathers and tie our currencies to gold?

Very few economists think this would be a good idea. The argument against it is one of pragmatism, not principle. First, a gold standard would have all the disadvantages of any system of rigidly fixed exchange rates—and even economists who are enthusiastic about a common European currency generally think that fixing the European currency to the dollar or yen would be going too far. Second, and crucially, gold is not a stable standard when measured in terms of other goods and services. On the contrary, it is a commodity whose price is constantly buffeted by shifts in supply and demand that have nothing to do with the needs of the world economy—by changes, for example, in dentistry.

The United States abandoned its policy of stabilizing gold prices back in 1971. Since then the price of gold has increased roughly tenfold, while consumer prices have increased about 250 percent. If we had tried to keep the price of gold from rising, this would have required a massive decline in the prices of practically everything else—deflation on a scale not seen since the Depression. This doesn’t sound like a particularly good idea.

So why are Jack Kemp, the
Wall Street Journal
, and so on so fixated on gold? I did not fully understand their position until I read a letter to, of all places, the left-leaning magazine
Mother Jones
from Jude Wanniski—one of the founders of supply-side economics and its reigning guru. Wanniski’s main concern was to deny that the rich have gotten richer in recent decades; but the letter also contained the following noteworthy passage:

Never mind the question of whether the Dow Jones industrial average is the proper measure of how well the rich are doing. What is fascinating about this passage is that Wanniski regards gold as the appropriate measure of wealth, regardless of the quantity of other goods and services that it can buy. Since the dollar was de-linked from gold in 1971, the Dow has risen about 700 percent, while the prices of the goods we ordinarily associate with the pursuit of happiness—food, houses, clothes, cars, servants—have gone up only about 250 percent. In terms of the ability to buy almost anything except gold, the purchasing power of the rich has soared; but Wanniski insists that this is irrelevant, because gold, and only gold, is the true standard of value. Wanniski, in other words, has committed the sin of King Midas: He has forgotten that gold is only a metal, and that its value comes only from the truly useful goods for which it can be exchanged.

I wonder whether the gods check out my columns. If so, they know what to do.