Hamiltonian Advice for Chicken Littles

Published August 9, 2011

National Review Online


To ask “Is the S&P downgrade fair? Whose fault it is? What can be done about it?” is like posing those questions about a thermometer that reads 99 when the temperature in Washington, D.C., is actually 90 degrees in early August. The thermometer is inaccurate, possibly due to malfeasance on the part of the manufacturer. But it’s still August in Washington.

Who deserves blame for that? God? The thermometer’s manufacturer? Global warming? Or Thomas Jefferson and Alexander Hamilton, for having solved America’s first debt crisis by sitting our nation’s capital in a tropical swamp, to get the votes of Virginians that Hamilton needed to get Congress to pass his plan for the federal government’s assumption and payment of the debts of the feckless Continental Congress and colonial governments? (Which his strategy did, by the mid-1830s.)

Like all commercial rating agencies, Standard & Poor’s has the same hand-in-pocket relationships as members of the U.S. Congress have with the partisan factions they represent. S&P was negligent in certifying low-grade junk as high-grade before the 2008 crash. But that didn’t cause the crash. And the folks at S&P bootlegged their own clueless and partisan comments about taxes into the downgrade, while making huge careless mathematical errors. But as James Madison and Alexander Hamilton explained in the Federalist, this is the way a workable political system behaves, because it is peopled by human beings, not angels.

The main reason the stock market has been falling is not S&P’s downgrade or even the fecklessness of Congress. As I explained in a paper published in October 1997, “The tremendous rise of the stock market since 1980 is due primarily to the relative rise in the number of Baby Boomers saving for retirement. This has bid up stock prices to the benefit of their parents’ generation, which bought stocks while prices were relatively low.” But, “the same factors imply that the stock market’s total return will peak relative to the economy before the year 2000, and decline sharply thereafter.”

I wrote the paper to explain why it was fatuous to believe that privatizing Social Security could solve its long-term financial problems, because markets are affected by exactly the same demographic bust caused by Roe v. Wade. It’s also the main factor in the long-run budget deficits.

But both the stock market’s latest decline and Congress’s inability to balance the budget are related to a different problem: Congress having abandoned Hamilton’s first principle of American political economy: Don’t issue money to fund the federal deficit.

I predict that the next successful president will hire another Hamilton to restore the gold standard, and end the dollar’s role as the chief official reserve currency of the world by repaying outstanding dollar reserves.

If you think I’m crazy, I’ll simply remind you that I participated in several initiatives, including the tax reforms of 1981 and 1986, that were pronounced ridiculous, crazy, impossible—right up to the day they were signed into law. And lawmakers jostled to be in the Rose Garden and take home a pen that the president used to sign the bill.

John D. Mueller is the Lehrman Institute Fellow in Economics at the Ethics and Public Policy Center.

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