An open letter to Larry Lindsey:

In your Wall Street Journal op-ed of Jan. 27, remarking on “The
17-Year Boom,” you opened by saying Bill Clinton would probably take
credit for the booming economy when he delivered his State of the Union
speech that night. He did. But as I read on, looking for your take on
who should get credit, I never found the names of any of the original
supply-siders or of Ronald Reagan. Instead, I find this outrageous
statement: “Economists came to see ‘supply side’ management of both
inflation expectations and the supply of labor and capital as at least
as important as ‘demand side’ management of spending power. Milton
Friedman’s lonely voice gave way to a chorus, and the Reagan
administration translated it into policy.”

Larry, this 17-year economic expansion had absolutely nothing to
do with the lonely voice of Milton Friedman
. It was, in fact,
Friedman and his dopey monetarist idea that you could manage the
national economy to perfection by increasing the money supply by 3
percent a year that caused the worst inflation in world history! When
he persuaded Richard Nixon in 1973 to formally break the dollar’s link
to gold, the world economy went into a tailspin, from which it has not
yet completely recovered. Witness the poverty of five-sixths of the
world’s population. It was not until Ronald Reagan abandoned
Friedman’s experiment in 1983 — when to continue it would have meant
the collapse of all our money-center banks — that the 17-year expansion
began. The Fed then was allowed to provide the liquidity being demanded
by the market in order to capitalize on the lower Reagan tax rates.
That’s what was going on.

God only knows how you could spend all those years in the Reagan
administration, Larry, then several more years as a Federal Reserve
governor, and be so completely misinformed. Milton Friedman not only
screwed up the world monetary system. He also fought the supply-siders
on tax policy every step of the way. It was Milton Friedman who argued
that taxes should be cut in order to starve the government of
, while supply-siders argued they should be cut where they
are higher than they need to be to provide a desired level of revenue.
Didn’t you at least learn that much about what was happening under your
nose? It is no wonder that George W. Bush is now having such a hard time
wrapping up the GOP nomination, with you as his chief economic advisor.

It gets worse. You say: “Obviously, something started in the 1980s
that energized the economy like never before. What was it? Markets
simply were allowed to work.” For your information, Larry, a floating
dollar has nothing to do with “free markets.” That is a gross canard
that Milton Friedman has circulated for decades. It is when the dollar
is fixed to gold that the market determines both the demand for dollars
and the dollars supplied. When the dollar floats, it is the board of
governors that determines the supply of dollars, which in some ways also
determines the demand for them. Don’t take my word for it, kid. The
subject came up on July 22, 1998, at a meeting of the House Subcommittee
on Domestic and International Monetary Policy of the Banking committee,
with Fed Chairman Alan Greenspan in the witness chair. The following
exchange took place between Greenspan and Rep. Ron Paul, R-Texas, who
gets to be called “Dr. Paul” because he has a medical degree. Greenspan
has a doctorate in
economics, but only gets a “Mr.,” which shows you how much a Ph.D. in
economics is worth these days.

Dr. PAUL. A very quick question. You seem to welcome, and you have
been quoted as welcoming, a downturn in the economy to compensate for
the surge and modest growth in the economy. Is it not true that in a
free market, with sound money, you never welcome a downturn in the
economy? You never welcome the idea of decreased growth, and you don’t
concern yourself about this? And yet, here we talk about when is the Fed
going to intervene and turn down the economy? It seems that there is a
welcoming effect to the fact that the Southeast Asia has tampered, you
know, price pressures. Couldn’t we make a case that the free market
would operate a lot better than the market we use today?

Mr. GREENSPAN. I think you have to define what you mean by a ”free
market.” If you have a fiat currency, which is what everyone has in the
world. …

Dr. PAUL. That is not free market.

Mr. GREENSPAN. That is not free market. Central banks, of necessity,
determine what the money supply is. If you are on a gold standard or
other mechanism in which the central banks do not have discretion, then
the system works automatically. The reason there is very little support
for the gold standard is the consequences of those types of market
adjustments are not considered to be appropriate in the 20th and 21st
century. I am one of the rare people who have still some nostalgic view
about the old gold standard, as you know, but I must tell you, I am in a
very small minority among my colleagues on that issue.

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