Over the years, I’ve had the chance to correspond with John Tamny about various topics in the field of economics, and, – being an admirer of his columns ( which can be found in Forbes or at RealClearMarkets.com, a site of which he is the editor), – I was excited to read his new book, Popular Economics: What the Rolling Stones, Downton Abbey, and LeBron James Can Teach You about Economics. Popular Economics is a great read for anyone who is interested in economics, or for anyone who would like to understand how popular culture can teach you about economics.
Mr. Tamny, who is also a frequent guest on Forbes On Fox on the Fox News Channel, was kind of enough to do a brief Q&A with me regarding several economic themes which are covered in his book.
Lawrence: Given all the talk about how the Chinese “own” us because they hold so much of our debt, I found it fascinating that, in your book, you mention that the Chinese themselves run large budget deficits. [Some estimates I’ve seen show that the debt-to-GDP ratio for China has doubled from about 20% in the late 1990s to north of 40% today.] In fact, you make the case that running deficits is a normal and healthy thing for rich nations, and you point out that many poor countries, on the other hand, such as Honduras and Nicaragua, have no debt because nobody will loan them money. However, do you see any need for concern regarding our current national debt?
John Tamny: I don’t think running deficits is healthy as much as a country’s ability to run deficits is a sign of market confidence in the economy of that country. We’re talking about sophisticated investors in very deep markets. They’re generally not going to buy country debt that (nor will lenders lend) will not be paid back. That’s why thriving countries can run deficits, but poor one’s can’t. The U.S. is populated by some of the most productive people on earth, so it’s no surprise that the political class can run up deficits.
Beyond that, my point on deficits is that they’re irrelevant. Would we prefer annual deficits of $500 million on $1 trillion in spending, or a $3.5 trillion balanced budget? Obviously, we’d prefer the former because it signals politicians are spending much less. In that sense the focus should be on what Washington is spending, not whether or not it’s “deficit” or “surplus” spending.
Realistically, ALL government spending is deficit spending simply because governments have no resources. They can only spend what they’ve taxed or borrowed from us first. Deficits are just accounting. The main truth is that when governments spend less we’re more prosperous simply because precious resources remain in the private economy.
Lawrence: You make the case that the Fed actually hindered rather than helped the economic recovery post-2008 by implementing ZIRP (zero interest rate policy). How do you counter those who say that the economy (and the stock market, for that matter) would be doing much worse if not for the Fed?
John Tamny: This one’s simple. Can readers name a time in the history of the world where an economy or market was improved by government intervention? Markets aren’t machines; they’re just people with differing opinions. When “markets” sell off that’s a happy and healthy sign of bad ideas being relieves of precious capital so that good ideas can access the same.
Recessions are healthy for the same reason. They signal an economy cleansing itself of bad investments, horrid businesses, and labor mismatches. When markets sell off we’re generally seeing much the same. With recessions we know that when left alone, the rebound is brilliant. Logically it is. The recession is the cure. So is the bear market. If the Fed had stayed out of the way, the market cleanse would have been even greater, and so would the rebound as a result.
Lawrence: Americans are taught that owning your own home is a necessity, and that owning vs renting is a no-brainer because houses are great investments. You argue that housing is a consumption item, and that by subsidizing home ownership [through mortgage interest deductibility, for example], the government is misdirecting capital and probably creating a drag on the economy. Can you elaborate on this?
John Tamny: The book does this pretty extensively, but think about it. When you buy a house, doing so won’t make you more productive, open foreign markets for you, it won’t lead to software innovations or cancer cures either. Housing is consumption. It’s necessary consumption, but there’s no expansive benefit from it in the way that your investment in a software company could change how businesses operate. We produce to consume, but let’s face it, most of us save too. Your clients are saving. If all we did was consume we’d still be living in caves. Entrepreneurs need savings to innovate.
To be fair, government subsidization of any act is problematic. Governments shouldn’t favor what we do with our wealth. With housing they go out of their way to encourage consumption of housing. Ok, but when we consume with abandon, that means there’s less capital for entrepreneurs.
Lawrence: To follow on that thought, you point out that real estate became a favorite investment during weak-dollar periods in the 1970s and 2000s. The dollar, of course, lost its linkage to gold in 1971 due to a decision by President Nixon. Do you think there is any real chance for a modern gold standard, and, if so, at what level would you like to see the dollar fixed? Would it matter if no other nations followed suit?
John Tamny: Yes. Absent the dollar’s decline in the ‘70s and ‘00s there’s no major housing boom in either decade. The odds of returning to gold – for now – are perhaps slim, but not for any good reason. Economists think it’s a bad idea, but then economists thought tax cuts in the early ‘80s were a horrid idea. Money’s sole purpose is a measure to facilitate exchange of real wealth. Gold has historically been the most stable commodity, so it’s made sense as a measure to define money with. There’s nothing much to this.
If other countries didn’t follow our lead it would be their loss. They would have money that is less useful as a medium of exchange and investment. We would be more prosperous for having good money. To believe there’s a reason to have floating money is to believe that governments can create prosperity by virtue of playing around with the proverbial measuring stick. What a laugh. They can devalue the foot, but I’ll still be six feet tall. Governments can play around with money, but reality will still be reality. Governments can’t change this; they can at best create more economic uncertainty and less wealth creation, at worst they can create utter chaos.
Importantly, assuming we went back to gold much of the world would use dollars no matter country decisions about their own currencies. They would because producers desire stable money. Logically. Stability is money’s only purpose. Still, assuming a return by the U.S. Treasury to a gold defined dollar, the world would quickly follow. There would be no choice. Their currencies would have little exchangeable value next to a gold-defined dollar.
What price? I like for ease defining the dollar in terms of the 10-year gold average. This means debtors and creditors are equalized as much as possible. Assuming no return to gold, eventually private currencies will do it for us. Stable money is too convenient.
Lawrence: One topic you didn’t discuss too much in your book is immigration. It seems axiomatic that a nation benefits from more human capital coming to its shores, but many people see immigrants only as competition. What changes would you make to current immigration policy?
John Tamny: Yes. In the introduction I say we’re a rich nation because we’re a nation of immigrants, but didn’t get into detail. Still, the most important capital is human capital. Immigrants are especially precious human capital because by their very name they’re risk takers. There’s a reason the U.S. is known for its entrepreneurs. We are because we are immigrants or we descend from them.
Immigrants aren’t competition. They’re instead productive inputs. Is the NBA weaker because of the internationalization of it, or is it stronger? Is Silicon Valley weaker due to immigrants? No, their arrival is a magnet for global investment.
My answer would be to legalize ALL work. Open the borders to eager workers. Just tell them to announce themselves. Let them go back and forth. Markets will then decide how many or how few we need. Citizenship would almost be irrelevant under such a scenario. People are coming here for opportunity. Let them. We’re better for it. If some want to be citizens, set up something to make that happen for those who desire.