No to the Flat Tax, Gold Standard and Other Stale Ideas

Free enterprise, free markets, competition, and choice: All are timeless economic principles, but their application can and should evolve with changing economic circumstances. When Ronald Reagan was elected president in 1980, the top income-tax rate was 70 percent, inflation was 13 percent, health-care spending was 10 percent of GDP, and publicly held debt was 26 percent. The average American was 30 years old.

Today, the top marginal tax rate is 40 percent, and inflation is 2 percent. Health-care spending and the debt have both risen by nearly 80 percent as a share of output. The average American is 37 years old. Economics and demography require a reworking of the conservative policy portfolio. But center-right politicians in Washington keep offering same-old, same-old stale solutions. A few examples:

1. The flat tax: In the 2012 Republican presidential race, candidates including Rick Perry and Newt Gingrich proposed a flat tax on personal income. The idea seems likely to pop up again in 2016. Most flat-tax proposals are a version of a flat consumption tax devised by economists Robert Hall and Alvin Rabushka. If you were creating a tax code ex nihilo, the flat tax might well be the way to go. Simulations, not to mention common sense, suggest that a flat tax with a low rate would produce a larger economy than the current mess of a tax code does.

But we are not starting from scratch. It would be problematic to transition to a flat tax — at least at the 15–20 percent rate typically proposed — from a tax code that has nearly half of Americans paying no income tax. A flat tax would probably generate too little revenue, making budget deficits worse. One smart way to tweak the idea would be to keep the consumption-tax aspect while adding a more progressive rate structure.

2. The gold standard: The party platform adopted at the Republican National Convention in Tampa included a plan calling for the creation of a commission to consider restoring the dollar-gold link. Been there, done that. A similar panel established by President Reagan dismissed the idea. More recently, a University of Chicago survey of 40 economists found unanimous and vehement opposition to resurrecting the gold standard.

Those results are hardly surprising. The gold standard played a central role in the Great Depression and the severe deflation that accompanied it. Its return would hamstring the Federal Reserve in any effort it made to prevent future recessions from morphing into depressions. The latter, by the way, tend to usher in dramatic expansions in the size of government. A better option would be to anchor monetary policy not in stuff mined from the ground, but rather in futures contracts linked to market forecasts of nominal gross domestic product.

3. The Balanced Budget Amendment: A hot issue in the 1990s, the BBA fell off the radar screen when it looked as if the U.S. faced surpluses as far as the eye could see. But the trillion-dollar deficits of the Obama era have revived the idea. Senate Republicans have submitted legislation for a BBA that would limit government spending to 18 percent of GDP. Putting aside the debate over the wisdom of tying the hands of future Congresses in unforeseen economic circumstances, 18 percent of GDP is too low a long-term spending target given the aging of the U.S. population. Over the next 25 years, 60 percent of the rise of health-related entitlement spending will come from aging, and only 40 percent from inflation in that economic sector. “Even in the unlikely scenario that we completely conquer health cost inflation, we would still have to confront the bigger problem of the growing number of people receiving federal health benefits,” explains former Social Security and Medicare trustee Charles Blahous in a recent analysis for e21.

If you want to implement a BBA, a better long-term target would be 25 percent higher. But why do we need to actually balance the budget? Representative Paul Ryan’s original “Roadmap” plan, for instance, lowered the debt-to-GDP ratio by 30 points over two decades without a single year in the black. Given that the average U.S. debt-to-GDP ratio was 37 percent from 1957 through 2007, a better bipartisan policy goal would be to immediately move the debt-to-GDP ratio onto a downward trajectory, back toward that 37 percent level (from a forecasted 76 percent this year) over the next two decades.

Timeless principles with timely policies: It’s time for Washington to start paying attention.

— James Pethokoukis, a columnist, blogs for the American Enterprise Institute.

The gold standard played a central role in the Great Depression and the severe deflation that accompanied it. Its return would hamstring the Federal Reserve in any effort it made to prevent future recessions from morphing into depressions.

That's the point. The Federal Reserve causes the recessions through its incessant money-printing. I'd not only "hamstring" the Fed; I'd abolish it.

A better option would be to anchor monetary policy not in stuff mined from the ground, but rather in futures contracts linked to market forecasts of nominal gross domestic product.

Nonsense. The point of a gold standard is that money should have a fairly constant value. Gold provides that because the amount added each year through mining is a tiny, tiny percentage of the gold already in existence.

I'm disappointed to find out that Pethokoukis is just another advocate of "flexible" money. Very disappointed.

University of Chicago survey of 40 economists found unanimous and vehement opposition to resurrecting the gold standard.

Forty foxes vehemently opposed putting locks on the henhouse door...

People like Bob Dole used to be mainstream conservative Republicans. Then Jack Kemp slapped us alongside the head with a blinding flash of the obvious: by opposing Democrat spending and then supporting taxes to balance the budget to avoid inflation, Republicans were acting as enablers for the Democrats’ “tax and tax, spend and spend, elect and elect” strategy. Kemp struggled in the 1970s to get Republicans to stop doing it, and finally with Reagan in the White House committed to Kemp-Roth, Kemp triumphed when the income tax rate was slashed and tax revenue essentially doubled over less than eight years.
That is relevant to the Gold Standard, in the sense that Jack Kemp published an open letter to Reagan before his inauguration, advocating that the US government should sell off Fort Knox. His purpose? He asserted that if the US did not have any significant gold reserve, that would ironically put the US on a gold standard. He argued that, without that gold, the only thing sustaining the value of the dollar would then be fiscal discipline. There would not then, in his theory, be any way to operate financially without keeping the books in good balance. The situation, IOW, would be so dangerous it would be safe.

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