If Our Politicians Lack Courage, Give Me the Gold Standard
Back in the Sixties, President Lyndon Johnson tried to wage the Vietnam War and launch the welfare programs known as the "Great Society" at the same time.
In a classic example of the "guns and butter" tradeoff, the president was unwilling to make a decision between guns or butter. He would not reduce domestic spending and he would not cut back the growing Vietnam War.
Nor did he wish to risk popular support by increasing taxes to pay for his ambitious agenda. He simply ran budget deficits.
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By 1967, economic pressure caused by deficit spending in that bygone era of sound money (the US was part of the Bretton Woods Agreement) forced President Johnson to seek a tax increase to pay for the war and the domestic welfare programs. Within a year of his request for a tax increase, President Johnson accepted the fact of his declining popularity and dropped his efforts to be reelected.
In 1971, President Nixon faced essentially the same problem. Like President Johnson before him, Nixon did not wish to make a choice between guns or butter, nor did he wish to increase taxes and risk his reelection. President Nixon chose instead to terminate the Bretton Woods Agreement. In so doing, Nixon put an end to the era of sound money.
In the ensuing forty-four years, the US has not been forced to make a choice between guns and butter. Without the discipline of a sound money standard, the US has been able to inflate the dollar, borrow massive amounts of money, and print money as needed to have both guns and butter.
President Bush became the first US President to wage a war without increasing taxes to pay for it. President Obama did increase taxes, but the increase in taxes was not even enough to pay for the increased domestic welfare programs enacted on his watch.
We may soon be reaching the point where the President and the Congress will have to make a choice between guns and butter. The national debt has grown to levels last seen at the end of World War II, and we have the prospect of future deficits as far as the eye can see and computers can project.
In 2010, when the debt was "only" $13.2 trillion (it is currently $18.6 trillion), Admiral Mike Mullen, then Chairman of the Joint Chiefs of Staff, warned that the national debt is "the single biggest threat to national security". As he explained, the enormous debt will severely limit the options available to the President when faced with future crises. Despite his warnings, deficit spending is still out of control.
In the recent budget deal, out-going Speaker Boehner and out-going President Obama missed an opportunity to put the country on a better fiscal footing. They chose to pass the buck. The next President and the next Congress will inherit growing deficits (according to Congressional Budget Office projections) and the growing burden of the national debt.
The terrorist killings in Paris last week may force the guns and butter choice to a place where it cannot be ignored or postponed. Perhaps the national debt is among the reasons President Obama appears to show so little leadership or even interest in defeating ISIS. Perhaps he knows that to fight a serious war on ISIS America would need raise taxes or make a choice between guns or butter. Perhaps President Obama, like President Johnson, does not wish to put the cost of his signature welfare program, Obamacare, up against the cost of fighting a war. If so, Admiral Mullen's warnings have already come true. The national debt has used up financial options that were once available, to the detriment of our national security.
The President and the Congress are unwilling to raise taxes to pay for another war, even against a foe as evil as ISIS. We have reached a stalemate in American governance. The stalemate is not between Democrats and Republicans. The stalemate is between the government and "we, the people." The government extracts as much tax revenue as we the people will stand for. Today, the government is unwilling to seek more tax revenue from the people.
Perhaps the government is economically unable to extract more taxes from the economy, due to behavioral dynamics illustrated by the Laffer curve. Whether the government is unwilling or unable to raise taxes, this is the reason for inaction in Washington. The politicians have run out of tax money to grease political wheels to get anything done. They are unwilling to make the tough choices to cut spending in one place to pay for priorities someplace else. So there is stalemate.
Meanwhile, deficits continue and the cost of unfunded promises in Social Security and Medicare and Obamacare continue to grow year by year. The national debt grows larger and threats to national security are downplayed by the President.
In theory, the fiat money system we have had since Nixon is economically as functional as the gold standard system that existed for millennia before Nixon. But fiat money, with no fixed value, has proven itself incapable of providing disciplined guidance to the political class. Politicians, especially in democracies, will avoid unpopular decisions until there is no alternative. A fiat money system provides politicians with alternatives, and permits procrastination to the point of danger. A sound money gold system does not. It signals early when a difficult decision has to be made and the transparency of the signal forces politicians to act responsibly.
No one likes to make tough choices. America has not had to make such a tough choice in nearly half a century, when it last raised a war tax in 1968. In this current era of unsound money, the government has ducked making choices and opted to run up the national debt. We need adults in Washington with courage to make the hard choices necessary to preserve our national security. Or we need a gold standard.
