Recently, as the mainstream media pounded away in its coverage of the subprime mortgage “crisis” and the political class scrambled to “do something”, I looked back to the most recent replay of such moments, the 9/11 and Enron scandal induced, pre-tax cut recession of 2001.  At that point, just as Federal Reserve Chairman Alan Greenspan rendered his judgment that the recession had run its course and expansion was well underway, the then Republican controlled Congress gave us an economic stimulus plan whether we needed one or not.   Of course, none of this had any impact on the economy until the Bush tax rate reductions of 2003 put us on the growth track that has persisted until this very day. 

“We are all Keynesians now” is a quote that has been variously attributed to Milton Friedman, who says he was quoted out of context, and Richard Nixon, who threw in the towel on fiscal and monetary policy discipline in 1971 and ended the Bretton Woods accord on the gold-backed dollar while resorting to wage and price controls in a disastrous attempt to control inflation.  Actually, the British economist  John Maynard Keynes would be appalled at much of the irresponsible monetary and fiscal policy that has been pursued in his name, and once said “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency”.  Yet here we are, almost seven decades later, resorting to demand-side stimulus plans for feel good solutions to economic slowdowns that have nothing to do with demand-side problems.  For Keynes would be the first to say that we can’t consume what we don’t produce and the idea that government can deliver something for nothing is a pipe dream.

We have such short memories.  Remember when Ronald Reagan took office in 1981?  The national psyche at the time was that stagflation was embedded in the national economy, that industrial planning was the order of the day, and that the Phillips Curve mandating an inverse relation between inflation and unemployment was inviolable.  Then two things–the Reagan supply-side tax cuts and the monetary policy of the Paul Volcker Federal Reserve–changed the mindset.  Was there pain?  Sure there was, but the pain was a necessary price to pay to squeeze moral hazard out of the market and send the message to our risk analysts and our foreign investors, including central banks, that the U. S. was serious about breaking the inflation cycle and preserving the value of the dollar. 

For about 15 years we maintained fealty to this discipline.  Then, beginning with the Rubinomics of the Clinton administration in the late 1990s (devotees of the Phillips Curve) and the Alan Greenspan Federal Reserve, we ”fell off the wagon” and allowed the money supply to grow too rapidly and rates to remain too low for too long, feeding an overinvestment in high risk assets, devaluing the dollar to the detriment of our credibility with foreign central banks and investors, and defaulting in our discipline in maintaining price stability.   

To turn things around, we need an immediate change in course.  The Federal Reserve should announce that henceforth it will have as its top priority the enhancement and preservation of the value of the dollar and it should abandon its short-term management of the overnight Federal funds rate and allow the rate to float, while focusing on reducing the money supply and lowering the price of gold to reverse the inflationary psychology that is creeping back into the commodity markets and the mindset of investors and foreign central banks.  Then we need real stimulus in the form of the permanence of the Bush tax cuts,  accelerated depreciation of capital expenditures, and reversal of the most onerous provisions of the Sarbanes-Oxley regulations that are stifling capital formation and sending American business to foreign capital markets for their investment banking needs.

A recession is not inevitable.  With responsible and determined policy changes, it can be avoided.  Not without pain, but with the re-establishment of our credibility in foreign markets and the avoidance of a return of the inflationary mindset and undermining of the currency, which should have the highest priority.

John McCain’s almost miraculous comeback from near death as a viable candidate to the point of being the presumptive Republican Presidential nominee has put the American conservative movement in its most difficult spot since the rise of the right propelled Barry Goldwater to the GOP nomination in 1964.  How the movement responds to this challenge will have very far reaching consequences for the next several decades.  I have said that this election just might be the most critical since 1980 and possibly since 1932, and it is playing out just so, but the stakes are much higher for the Republicans and the conservative movement than for the Democrats and the left.

How did we get here?  Well, in the first place, we conservatives have only ourselves to blame for painting ourselves into this corner.  We allowed the revolutionary and euphoric election of 1994 to degenerate into a struggle to protect the perks of partisan power and the spoils of the majority.  We looked the other way when our “compassionate” conservative President signed the campaign finance bill restricting political speech co-sponsored by John McCain, a bill creating a massive new drug entitlement program, an executive order expanding tariffs on imported steel, and an embarrassing. farm bill that in effect repealed the revolutionary Freedom to Farm Act of 1996, among other projects of ”big government conservatism”.  We didn’t seem to notice or care when Tom Delay replaced the Democratic lobby teams on K Street with Republican teams representing the same special pleaders in the misguided and unprincipled Republican “K Street Strategy” that resulted in total complicity in the more than quadrupling of “earmarks” that has totally undermined the credibility and historic GOP reputation as the party of fiscal responsibility and limited government.

Secondly, although the conservative movement suffers from the absence of a coalescing leader, the problem is more about ideas than personalities.  Reagan came to town with two organizing principles–shrink government and win the Cold War.  He then infused us with enough renewed confidence in the American experiment of the “city on a hill” that we accomplished the second objective and temporarily succeeded with the first one.  But the issues now are more diffused, most of them don’t break out neatly along ideological lines, and don’t as readily lend themselves to movement politics.  Enter a moderate maverick with a mixed conservative record who is a favorite of the talk shows and the favorite Republican of most liberals.  The conservative movement gags–is this the guy who will preside over the reconstitution of the conservative movement and redefine the organizing principles?

My short answer is NO.  But it is what it is, and I believe we must recognize that we are in a transition period during which the movement will need some time to sort things out and identify the next generation of principled leaders around whom to coalesce.  They are out there (a good example from the left is Barack Obama–where was he six years ago?).  Meanwhile, conservatism has been the movement of ideas for the past fifty years, but has recently lost its edge and needs to regain it, so the gritty work of issue development must kick into high gear.  And everything but core principles should be on the table.

What about 2008?  To me, it’s not pretty, but it’s simple:  conservatives don’t have the luxury of accepting a loss to Clinton or Obama in hopes of a “cleansing” effect of the electorate in preparation for another revolution in two or four years.  As Daniel Henninger of the Wall Street Journal has noted, it’s “McCain or the wilderness” and possibly for a long time to come.  So whenever I get the urge to be passive about this election and the choices, I remind myself of the only possible answer to this question: Who do you want as Commander in Chief and to appoint the next two Supreme Court justices?  All else is at least debatable and we can fight about it on another day, but if we get the answer to this question wrong there might not be another day for a very long time.  Watershed moment, indeed.

“Trade is a real test of leadership since its benefits are often less obvious than its downsides.”–David Ranson, H. C. Wainwright Economics, Inc. in the Wall Street Journal, 2-6-08.

How true, and how difficult for the Republican Party, which, at least at the Presidential level, has been the leading free trade party for many decades, while the Democratic Party has essentially become officially anti-free trade.  But the conundrum and the difficulty is manifest in Republican and free-trader Congressman Kevin Brady’s observation that the free trade issue makes for a lot of temptation to be a populist.  No problem for Mike Huckabee, who won the endorsement of the machinists union with such statements as “I’m running for President because I don’t want people who have worked loyally for a company for 20 or 30 years to walk in one morning and be handed a pink slip and told ‘I’m sorry, but everything you’ve spent your life working for is no longer here’”.  This brand of populism plays well with protectionists, but that won’t keep America in world trade leadership. 

Recent polls show that Americans are trending against free trade–46% of adults think free trade agreements hurt the U. S., 16 points more than in 1999, and 59% of Republican primary voters said that free trade has been bad for America.  Several years ago, Sen. Charles Schumer was traveling around with economist Paul Craig Roberts, not exactly a raving liberal, making the case that David Ricardo’s centuries old and widely held concept of comparative advantage among nations is no longer viable because the factors of production that were historically relatively fixed in place are now those such as technology, ideas, and capital that can be moved with a computer click.  What do we do about all of this, or more particularly, what does government do about it?

First, as always, do no harm.  And one of the ways to avoid harm is to take the issue seriously, because if the debate is between those who dismiss the problem and those who have a bad solution, the bad solution folks will win.  And simply to recite old maxims will not do it.  We must have a serious and substantive debate about how to deal with the realities of globalization on the ground with real people–people who don’t have the necessary skills for adaptation or the money or the mobility for retraining and relocation.  And incidentally, this should include a debate on the continuing viability of the doctrine of comparative advantage. 

Paul Samuelson, probably the leading free trade enthusiast in the economics profession, notes that Ricardo’s theory, fully implemented, implies that worldwide income per capita increases enough so that the winners will more than offset the losers, but he is concerned that wealthy countries like the U. S. may be among the losers, while India and China will be the big winners.  And he is probably correct in terms of traditional value-added measures, but America’s value-added comparative advantage is more about ideas and innovation than things.  Which is my opening to say that it will be the transformation of K-12 education in this country (or our failure to drastically transform it) that will have more impact on our success in dealing with the challenges of free trade than any other factor.  

There are plenty of ideas afloat.  All the Presidential candidates have issued their detailed approaches.  And like most policy proposals they interconnect with other policy issues, like farm subsidies and labor and environmental regulations, for example.  So look closely and let the debate rage on. 

George Weigel wrote a great essay in the January 2008 issue of First Things in remembrance of long-serving Congressman Henry Hyde who died last November, and among the quotes from Hyde included was one worth repeating.  It is from a speech he gave over 20 years ago to a luncheon for newly elected members of Congress, as follows.  It should be required reading for all of them.

“You are basking in the glow of victory and that is certainly understandable.  But permit me to suggest, on the basis of long experience, that if you don’t know what you’re prepared to lose your seat for, you’re going to do a lot of damage up here.  You have to know what you’re willing to lose everything for if you’re going to be the kind of member of Congress this country needs.”

Amen.