A common-sense approach to recession

by Keith Barber

US Rep. Ron Paul (R-Texas) delivered a stirring address at Wake Forest on April 20. The Young Americans for Liberty sponsored the event, and Paul, who ran for the Republican presidential nomination in 2008, found a highly receptive audience inside the confines of Wait Chapel.

“We live in a very dangerous time,” Paul told the hundreds in attendance. “I expect a lot of chaos and trials, but I also believe the spirit of liberty still lives in this country. Enough people will wake up and our voices will be heard.” Paul’s comments inspired thunderous applause. The Texas statesman then used the current economic recession as a metaphor to advance his personal platform of smaller government, individual liberty and personal responsibility. “The investment for all of us right now is investment in the cause of liberty,” Paul said. “Ultimately the most important investment is investing in a free society. That is why America was great: America was great because we had the best understanding, the best constitution, the freest system ever, and the most prosperous.” At the conclusion of Paul’s 60-minute oratory, scores of audience members inside the chapel rose to their feet to give the talented speaker a standing ovation. Paul is clearly a gifted speaker with the ability to fire up an audience, but his ideas of how to fix our federal government and ailing economy are far too simplistic. He undoubtedly believes in the ideas he espouses, but Paul’s ideas of abolishing the personal income tax, abolishing the Federal Reserve and taking the country back to the gold standard, are not the solution to the current recession. Our nation’s economic predicament is far too complex, and it cannot be solved with political slogans. Wake Forest economics professor Robert Whaples said he is sympathetic to a lot of libertarian ideology, but he thinks going back to the gold standard would be a very bad idea, and he is not the only expert who feels this way. Whaples said he routinely surveys economists and 90 percent of those he interviewed agreed that returning to the gold standard would cause deflation — one of the root causes of the Great Depression. When the gold standard was functioning between the Civil War and World War I, the demand for money was growing faster than the supply, which led to deflation.

That ultimately led to the collapse of the US financial system, Whaples said. The instability of the banking system in the 1930s created widespread fear and caused people to hide their money inside mattresses rather than keeping it in banks. As the nation’s money supply shrank, prices of goods dropped dramatically. The cumulative effect drove the economy into the ground, Whaples said. The idea of abolishing the Federal Reserve — one of Paul’s big talking points — has also been roundly rejected by most economists, Whaples said. Extreme measures are not the solution to the current recession. Understanding what’s really going on in the financial world is the first step toward finding a viable set of solutions to prevent future crashes. Metaphors are always helpful in understanding complex systems. Whaples likens the nation’s economy to a circulatory system. “If capitalism has a weak spot it’s the way the financial system gums up at certain points,” he said. “The financial system’s job is to circulate credit to the arteries, but it can get clogged and we saw that happen last fall. That’s why the Federal Reserve was created, to do the angioplasty — to unclog those arteries.” Whaples also used the August 2007 collapse of the Interstate 35 bridge across the Mississippi River in Minneapolis as a metaphor for the natural forces at work in our economic system. He pointed out that the next day’s headlines didn’t read, “Gravity causes fatal bridge collapse.” “Surely, gravity was to blame, but like human greed, gravity is essentially a constant,” he said. “What we need to do is work with a system that stabilizes gravity, that stabilizes greed.” It wasn’t lack of regulation that led to the crash of 2008, Whaples said. Rather, it was having the wrong kind of regulations on the books that contributed to the collapse. Congress setting numerical guidelines for Fannie Mae and Freddie Mac to ensure loans went to certain households with specific median incomes offers a prime example of the wrong kind of regulations governing our financial system, Whaples said. Another big plank in Ron Paul’s platform is fiscal responsibility and a call for the federal government to balance the budget. But Whaples said storm clouds are gathering on the horizon in the form of the Social Security dilemma. “We’ve got these huge implicit promises, how much the government is going to be paying out versus how much it’s going to be taking in. It dwarfs today’s deficit,” Whaples said. “We’retalking on the order of $70 trillion looking into the future.” There isno simple answer for this dilemma. Therefore, I place more stock in theopinions of those who freely admit they don’t have all the answers thanthose who say with a few simple steps, we can turn this ship around. “We are in the worst financial crisis since the 1930s,” writes George Soros in his book The Crash of 2008 and What it Means. “Insome ways it resembles other crises that have occurred in the last 25years, but there is a profound difference: The current crisis marks theend of an era of credit expansion based on the dollar as theinternational reserve currency.” 

Unlikethe typical boom-bust cycle of the American economy, the currentrecession could last much longer than anything our nation has everexperienced, Soros writes. During an interview on NationalPublic Radio last week, the talk show host asked Soros to predict whenthe economy would turn itself around. Much to his credit, Sorosreplied, “I don’t know.” A giant in the world of finance admitted thathe didn’t have all the answers. Therefore, a politician should notoffer trite solutions to complex issues to gain votes or popularity ata time of national crisis.