Economics, Monetary Policy, Pethokoukis

The case for the gold standard is really pretty awful

Image credit:Covilha's Flickr photostream  (CC BY 2.0)

Image credit:Covilha's Flickr photostream (CC BY 2.0)

“Re-adopting the gold standard in America,” argues a surprising e21 editorial, “could spur the economic powerhouses of the world to join, creating more stable markets and prosperity across the globe. Let us hope.”

Let us hope what, exactly?  “Let us hope” that the gold standard is re-adopted? Unlikely, as even its proponents concede. “Let us hope” that re-adopting the gold standard would produce greater prosperity? Even more unlikely, if that’s possible. A new gold standard would risk deflation and depression.

For instance: imagine, writes economist Scott Sumner, a scenario where soaring Asian demand for gold raises the yellow metal’s purchasing power, “producing deflation in all countries that use gold as the asset in terms of which all prices are quoted.” With prices falling, demand would decline, unemployment would raise, and prices would fall further. At that point, fear of government abandoning the gold standard, Ramesh Ponnuru explains, might prompt gold hoarding, accelerating the deflationary spiral. As Tyler Cowen has put it, “Why put your economy at the mercy of these essentially random forces?”

AEI economist John Makin offers another scenario:

Consider for a moment a thought experiment wherein the US government unilaterally decides to fix the dollar price of gold at a level that implies lower inflation. Under the rules of the gold standard, that would imply setting the dollar price of gold at a level below the current world market price. But that would not work. At such a level, private gold buyers would purchase their gold from the United States and experience a windfall gain. The US gold stock would fall, and the US money supply would fall as well, given a rigid gold standard rule. That kind of a deflationary shock would be disastrous in the current environment …

There is good reason why in a 2012 University of Chicago business school poll of 40 top economists — academics on the left, center, and right —  found not a single one who agreed with this statement: “If the US replaced its discretionary monetary policy regime with a gold standard, defining a “dollar” as a specific number of ounces of gold, the price-stability and employment outcomes would be better for the average American.” In fact, 66% “strongly disagreed” with the statement vs. 34% who just “disagreed.”

Given the weight of evidence against the wisdom of returning to a gold standard, I would guess that for most people the idea merely reflects ideological nostalgia for the pre-New Deal period. A bridge back to the 19th century. In a review of “Money, Gold, and History,” by Lewis Lehrman, economist David Beckworth offers a path forward:

The supply of money is created mostly by banks and other financial firms. The demand for money is shaped by the needs of households and firms. Both are difficult to measure and individually beyond the direct control of the Federal Reserve. The product of the two, however, can be meaningfully influenced by the central bank. It is called total dollar spending, and its stabilization should be the objective of monetary policy. The Federal Reserve can do this by managing expectations of future total dollar- spending growth.

Here’s how: The Federal Reserve credibly commits to doing whatever it takes to keep total dollar spending growing at a constant rate over time. The public would come to understand that, if total dollar spending went above or below this target growth rate, the Fed would correct it. This belief would become a self-fulfilling expectation, requiring minimal action by the central bank.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.


What we’re reading today: September 10, 2014

Check out the top pieces we’re reading today on the economy, technology, education, and more.

1.) Manhattan Institute asks: are unions democratic?

2.) Government debt isn’t the problem—private debt is, argues Richard Vague in The Atlantic.

3.) At Education Next, Paul Peterson writes on what parents think about their public schools.

4.) Urban Institute looks at health insurance coverage for parents and children under the ACA in 2014.

5.) Jared Meyer outlines what Washington can learn from Apple in his e21 piece.

6.) From NBER: the changing benefits of early work experience.

7.) At NYTimes, Teresa Tritch discusses how unemployment insurance helps prevent foreclosures.

8.) Over at Brookings, William Gale and Andrew Samwick look at the effects of income tax changes on economic growth.

9.) In the Harvard Business Review, Roger Martin looks at the rise (and likely fall) of the talent economy.

10.) For the latest on robots, check out the humanoid robot Nao learning to drive its own car, and the nimble-wheeled robot working in MN.

11.) How long can the economy absorb excessive government spending? J.T. Young asks in his RCM article.

12.) Pew says the global public is downbeat about the economy. Here’s one of their charts:

Pew: Global public wary of economy's future

Follow AEIdeas on Twitter at @AEIdeas, and Natalie Scholl at @Natalie_Scholl.


Here is what conservative reform is not. Really, not at all

Lobbyist John Feehery, a former spokesman for former House Speaker Dennis Hastert, gives his interpretation of the current center-right debate on economic policy. One side, he writes in The Wall Street Journal, are the “evangelical libertarians” who believe “the free market has been tainted by political corruption. Crony capitalism can be defeated only by greatly reducing the size and scope of government: Get rid of the Export-Import Bank. Don’t extend terrorism risk insurance. End Fannie and Freddie. Get rid of corporate welfare of all kinds.”

Then, Feehery continues, there are the “Republican reformers”  who “don’t share the evangelical libertarians’ zeal in ending all government programs, but they see the need for reforms: Could the Ex-Im bank work better to protect domestic companies such as Delta? Sure. Could we ensure that taxpayers are not on the hook for a bailout of the GSEs without destroying the housing market? Certainly.The evangelical libertarians may have passion on their side, but politically speaking their position is far riskier.”

Now Feehery, it is clear, favors the “Republican reformer” approach. Unfortunately, people might confuse or conflate what he describes with the conservative reform movement, of which I consider myself part. A key part of conservative reform, in my view, is fighting crony capitalism and promoting free enterprise. Pro-market, not pro-business.

I wrote a whole chapter on this subject in “Room To Grow,” a compilation of conservative reform essays on everything from taxes to education to healthcare. Cronyism enlarges government, breeds corruption, and reduces economic growth by favoring politically connected incumbent firms (the kind who can hire pricey lobbyists) over startups. Cronyism is at the heart of what’s wrong with the American economy. Understanding that doesn’t make you some horrible libertarian caricature who wants to “eliminate government.” And, sorry, I really do want to get rid of corporate welfare of all kinds, whether they be special tax breaks, spending programs, regulations, or guarantees. Americans need a safety net, Corporate America does not. What’s “politically risky” about that position?

The debate, then, isn’t between evangelical libertarians and Republican reformers. It’s between those folks who understand Washington isn’t working and needs big, bold change — some of these folks are conservative reformers, others call themselves libertarian populists  – and those folks who are, really, kind of OK with Big Government as long as the status quo benefits them in some way.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

Pethokoukis, Economics, U.S. Economy

What we’re reading today: September 9, 2014

Pew: Federal minimum wage 1938-2013

Check out the top pieces we’re reading today on the economy, technology, education, and more.

1.) The Upshot rounds up the top colleges that enroll rich, middle class, and poor.

2.) From the St. Louis Fed: The Great Recession casts a long shadow on family finances.

3.) At the IMF blog, Era Dabla-Norris writes on why education policies matter for equality.

4.) Over at e21, Diana Furchtgott-Roth discusses the “coincidence” of CVS and tobacco.

5.) The New York Fed looks at why more renters aren’t becoming homeowners.

6.) Pew asks: who makes minimum wage?: “People at or below the federal minimum are”:

  • Disproportionately young: 50.4% are ages 16 to 24; 24% are teenagers (ages 16 to 19).
  • Disproportionately young: 50.4% are ages 16 to 24; 24% are teenagers (ages 16 to 19).
  • Mostly (77%) white; nearly half are white women.
  • Largely part-time workers (64% of the total).

7.) In his most recent WSJ article, Casey Mulligan writes on the myth of Obamacare’s affordability.

8.) Williamson Evers, in his latest at Education Next, talks about how the Common Core suppresses competitive federalism.

9.) Cato Unbound gives “the true story of how the patent bar captured a court and shrank the intellectual commons.”

10.) Christopher Einolf has a new blog at the Institute for Family Studies titled “Marriage and social capital: A generous or greedy institution?

11.) IEEE says that at the Mayo Clinic, IBM Watson takes charge of clinical trials.

12.) Americans don’t just work longer hours—they work stranger hours, according to this Quartz piece.

Follow AEIdeas on Twitter at @AEIdeas, and Natalie Scholl at @Natalie_Scholl.


Is the current job market recovery stronger than the one in the 1980s? C’mon

Reagan Foundation

Reagan Foundation

You can tease the data until they cry for their mothers, but you cannot plausibly make them declare that the jobs recovery after the 2007-2009 recession has been stronger than the rebound after the 1981-82 recession. But over at, Adam Hartung approvingly quotes some newsletter writer who attempts to make just this case:

President Reagan has long been considered the best modern economic President.  So we compared his performance dealing with the oil-induced recession of the 1980s with that of President Obama and his performance during this ‘Great Recession.’ As this unemployment chart shows, President Obama’s job creation kept unemployment from peaking at as high a level as President Reagan, and promoted people into the workforce faster than President Reagan. President Obama has achieved a 6.1% unemployment rate in his sixth year, fully one year faster than President Reagan did.  At this point in his presidency, President Reagan was still struggling with 7.1% unemployment, and he did not reach into the mid-low 6% range for another full year.  So, despite today’s number, the Obama administration has still done considerably better at job creating and reducing unemployment than did the Reagan administration.

If you think the jobless rate — despite all the current controversy about labor force participation and job quality — by itself reveals all one needs to know about the state of the US labor market, then your intellectually curiosity is easily sated. But even that aside, the comparison made above is silly. In the 68th month of the Obama presidency — the August job report is what we are looking at — the unemployment rate was 6.1% while 68 months into the Reagan presidency, the rate was 6.9%.

But the two presidents had recessions start at different points in their presidency. We are 54 months into the Obama jobs recovery and the jobless rate is down 3.9 percentage points from its peak. At 54 months into the Reagan recovery, the job rate was 6.2% (so about the same as today), down 4.6 points from its peak.

Just two more points: First, the current jobs recovery — as opposed to the official NBER recovery —  is 54 months long, during which 9.5 million jobs have been created. By contrast, 54 months into the 1980s recovery, 13.1 million jobs were created. (By the way, the adult civilian population today is 70 million higher than it was back then.) I think this actually ends the debate, but I will continue.

Second, during the Great Recession, the employment rate — the share of adults with a job — hit a low of 58.2%, down 4.7 percentage points from a precession level of 62.9%. It currently stands at 59.0%, up a mere 0.8 points from its low and still 3.9 points from its high. During the 1980s recession, the employment rate fell from 59.6% to a low of 57.1% and then rebounded to a new high of 60.7% by June 1977, the 54-month point of the jobs recovery.

Now I suppose you could try and make some relativistic argument keyed off the different natures of the two recessions. But in terms of raw, job-creating power, score one for the Gipper.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.


This is a real debate on the left: Should school reform be about what’s best for kids or what’s best for incumbent teachers?

New York magazine writer Jonathan Chait offers some insight into how the left and Democratic Party see education reform:

Not long ago, I described the split within the Democratic Party as centering around “whether public services should be designed for the benefit of providers or consumers.” Some readers objected that that description, and fair enough — opponents of education reform certainly do argue that their policies would benefit children. But it is also demonstrably true that some of the opposition to education reform is driven by a belief that it unduly prioritizes educational results over the welfare of incumbent teachers.

One recent Washington Post column defended teacher tenure laws specifically as a means of preserving jobs for the black middle class. The author, Andre M. Perry, did a poor job of defending his thesis even on its own terms — he asserted that eliminating tenure laws leads to a reduction in black teachers without presenting any data to support the claim. …  More noteworthy is Perry’s frank admission that urban schools should not maintain a singular mission of educating children, but should balance that mission with providing jobs to adult employees …

The same premise comes through in a column by Justin Minkel, published in Valerie Strauss’s anti-education reform blog. Minkel argues, “We don’t need to swap out all the bad and mediocre teachers for better teachers, anymore than we should swap out our struggling students for more advanced students.”

If you believe schools should be designed solely to promote education, then this equivalence is bizarre: Getting a quality education is a universal right, while holding a teaching job is not. Why should we treat these conditions as equivalent? On the other hand, if you consider teachers and students to be stakeholders with equal rights, to be balanced about equally, then the anti-reform line makes obvious sense.

In a way, this is a familiar story to me. Just another version, really, of the innovator vs. incumbent battle that I write so much about. Except for the innovator to succeed — in this case that often means charter schools — they actually have to produce results: namely, better educated kids. Their interests are aligned. The incumbent merely wants the status quo that has benefited them so much. And without accountability, teacher-student interests are not aligned. Chait’s insights are a useful addendum to the NY Times magazine piece on the running battle between NYC Mayor Bill de Blasio and Eva Moskowitz, who runs Success Academy Charter Schools. Both are people of the left, but with very different views on education.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.


Americans want to spend more money on preschool education. But should we really?

Despite it all, Americans remain a stubbornly optimistic people. How else can one explain a new Gallup poll that finds of 70% of us “favor using federal money to make sure high-quality preschool education programs are available for every child in America.” Another survey found that voters see providing universal pre-K as a policy that would boost economic growth.

That, even though studies continue to find the pre-K Head Start initiative has few lasting educational results. The latest research – “Experimental Evidence on Distributional Effects of Head Start”  by Marianne Bitler, Hilary Hoynes, and Thurston Domina – offers some good news: “We find that Head Start participation leads to large and statistically significant gains in cognitive skills in the preschool period in receptive vocabulary, early literacy, and early numeracy [and that] gains are largest at the bottom of the distribution of achievement … ”

But also some not-so-good news: “Once the children enter school, the overall cognitive gains fade out. We find little effect of the experiment on non-cognitive outcomes.”  Again, the Fade-Out Factor.

So we does that leave us? The researchers suggest “the gains in preschool may not persist if the elementary schooling environment is not of high quality.” Well, yeah. That is a problem, especially for an American educational system where, as my colleague Mike McShane puts it, “students still perform shockingly poorly in absolute terms.” He notes, for instance, that in the 2013 NAEP assessment only 35% of 8th graders were deemed proficient in mathematics, and only 36% were proficient in reading. Is that really an encouraging result for a country where per-student spending is up 120% since 1970 in real terms? And does that provide much confidence on our ability right now to scale-up pre-K programs and achieve sustainable results?

It’s also worth quoting Brookings’ Russ Whitehurst who has actually looked at various studies of state-level, pre-K efforts:

1.) Not one of the studies that has suggested long-term positive impacts of center-based early childhood programs has been based on a well-implemented and appropriately analyzed randomized trial, and nearly all have serious limitations in external validity.

2.) In contrast, the only two studies in the list with both high internal and external validity (Head Start Impact and Tennessee) find null or negative impacts, and all of the studies that point to very small, null, or negative effects have high external validity.

3.) In general, a finding of meaningful long-term outcomes of an early childhood intervention is more likely when the program is old, or small, or a multi-year intervention, and evaluated with something other than a well-implemented RCT.  In contrast, as the program being evaluated becomes closer to universal pre-k for four-year-olds and the evaluation design is an RCT, the outcomes beyond the pre-k year diminish to nothing.

4.) I conclude that the best available evidence raises serious doubts that a large public investment in the expansion of pre-k for four-year-olds will have the long-term effects that advocates tout.

So one area of potential compromise, I guess, would be for targeted programs along with deep education reform. Certainly not the New York City example which wants to combine universal pre-K with education deform.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

Pethokoukis, Economics, U.S. Economy

Study: Pretty much everything government touches is failing right now


“Can the U.S. compete internationally? Its companies can. Its workers cannot.” That’s the lede from Wall Street Journal reporter Josh Zumbrun’s story on a new competitiveness survey of Harvard Business School alums.

The above chart shows how respondents categorized various elements of the American business environment and how they have shifted since the original 2011 survey. Among those elements described as a “strength and improving”: capital markets, corporate management, universities, property rights, supply chains, and entrepreneurship. Among those elements described as a “weakness and deteriorating” are the K-12 education system, the tax code, regulation, and the efficiency of the legal system.

So I guess my lede would have been a big different: “Can the U.S. compete internationally? Its companies can. Its government cannot.”

American government isn’t taxing, educating, regulating, or adjudicating effectively or efficiently right now. You can be for smaller government while also wanting government that works better. In a 2011 McKinsey report on the US economy, the consultancy highlighted the low-productivity public sector as a key drag on growth. Public and regulated sectors such as health care and education represent more than 20% of the US economy. Cutting in half the estimated efficiency gap with similar private sector organizational functions would generate annual savings of $100 billion to $300 billion. How to do it?  McKinsey:

Many parts of these sectors would benefit from greater competitive intensity, more extensive use of technology, and applications of managerial innovation and productivity best practices learned from the private sector that are consistent with the broader goals of improved health and educational outcomes.

This will require more experimentation at all levels of government, including a greater willingness to see what works and what doesn’t in other advanced economies.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

Pethokoukis, Society and Culture

Why do the kids of married parents do better?

Brookings: Percent of children succeeding at each life stage by family structure

Over at Brookings, Kimberly Howard and Richard Reeves write on “why the children of married parents do better.” Is it because (a) those families have higher family incomes, (b) the parenting is more consistent, (c) marriage is the visible expression of other factors, or (d) marriage itself matters?

Howard and Reeves: “Parents who get and stay married tend to be different in many other important respects from single parents – including having more time, education, and income–and it may be these differences that lie behind the gaps in their children’s success, rather than the fact of marriage itself.

They determine that the “principal benefits of growing up with married parents appear to come from two sources”: a) more money and b) more engaged parenting. They conclude:

If the benefits of marriage for children can be explained by other observable characteristics of the family, and especially money or parenting behavior, then policy may be more successful if focused on those pathways…. Marriage is a powerful means by which incomes can be raised and parenting can be improved. But marriage itself seems immune to the ministrations of policymakers.

Here’s what AEI’s Brad Wilcox had to say in response:

This fascinating new line of research from Brookings shows us two things:

1) Children from intact, married families are markedly more likely to thrive; and

2) Some of the “marriage effect” can be explained by the higher levels of income, and better parenting, found in married families.

But, the second point does not mean that marriage per se doesn’t matter. That’s because marriage itself fosters higher income and better parenting among today’s parents. For instance, men who get and stay married work longer hours and make more money than their unmarried peers. And fathers and mothers who are in an intact marriage tend to engage in more involved, affectionate, and consistent parenting than their peers in single- or step-families.

The bigger point is this: you cannot easily strip marriage of its constituent parts, such as more money and a supportive parenting environment, give those parts to parents apart from marriage, and expect that children will do as well, apart from marriage.

Follow AEIdeas on Twitter at @AEIdeas, and Natalie Scholl at @Natalie_Scholl.


America’s miserable middle class: 56% say they’re ‘falling behind’

Image Credit: ThreeRivers11 /

Image Credit: ThreeRivers11 /

A new survey from Pew finds that views of the job market have gone up a little, however there has been no rise in economic optimism. Of the respondents, “33% say there are plenty of jobs available where they live, while 58% say that jobs are difficult to find.” Those saying jobs are available has increased “from 29% in July and 27% in April. Nearly two years ago, in December 2012, just 22% said there were plenty of jobs locally.

Pew: Views of local job opportunities improve modestly, August 2014

What did people have to say about the economy in general, though? Only “21% rate economic conditions as excellent or good, while 79% say they are only fair or poor.” As far as what the future holds, “about one-in-five (22%) expect that economic conditions will be better a year from now than they are today, while the same percentage says things will be worse; 54% expect conditions to be about the same.” Not particularly optimistic. And 67% of people say “‘the economy is recovering, but not so strongly.’ Just 8% say the economy is recovering strongly, while three times as many (24%) say it is not recovering at all.”

Pew: Optimism about national economy remains limited, August 2014

When it comes to personal finances, “42% say they are in excellent or good shape financially,” while 36% “say they are in only fair shape,” and 21% “say they are in poor shape.” A majority of 56% “says that their family’s income is falling behind the cost of living, while 37% say their income is staying about even; just 5% say their income is rising faster than the cost of living.” To put that in perspective, a similar majority of 57% “said their incomes were falling behind in October 2008 during the Wall Street financial crisis.”

That said, the public is generally hopeful about individual financial situations—more so than about the national economy—with 56% expecting “their financial situation will improve ‘some’ over the next year,” and 10% expecting “it will improve ‘a lot.’”

Follow AEIdeas on Twitter at @AEIdeas.