by Steve Forbes
Today’s global system of government-managed currency also permits political manipulation of exchange rates—the kind of “currency protectionism” we’ve described in this chapter.
We would not have these problems if the value of the dollar remained stable. That’s why many freemarket economists advocate constructing a new gold standard—setting the value of the dollar based on a fixed quantity of gold, or at least having it fall within a range of, say, $900 to $950 an ounce. Anchoring the dollar to gold would restore stability to global markets. It would sharply reduce the role of government and politics in determining currency values.
Today, for example, a country seeking to fund massive social spending will often do so by printing more money. What happens? The added money in circulation ends up lowering the value of its currency.
Gold is exceptionally well suited to anchoring currency values because its intrinsic value is constant. All the gold that has been mined is still in existence: gold cannot be destroyed. Even a major find wouldn’t be large enough to dramatically alter prices. Thus, you don’t get supply shocks and the kind of upheaval that, say, a drought might have on the price of wheat. In a report for the Cato Institute, University of Missouri economic historian Lawrence White writes that, while gold is not perfect, studies have shown it to be the best way to create an orderly global market.
A gold standard does not guarantee perfect steadiness in the growth of the money supply, but historical comparison shows that it has provided more moderate and steadier money growth in practice than the present-day alternative, politically empowering a central banking committee to determine growth in the stock of fiat money.46
Fiat currency encourages inflation because governments can capriciously print more money. The opposite is true of gold: in the years that the United States maintained a classical gold standard—from 1880 to 1914—inflation was virtually zero.
In the old days, Washington was obligated to convert to gold the dollars that were presented to it. This became a problem in the mid-sixties and early seventies, when the Federal Reserve, attempting to lubricate economic growth, printed too many greenbacks. It became impossible to maintain the dollar’s value at thirtyfive dollars an ounce.
The United States abandoned the gold standard, as Lawrence White has observed, not because of any flaw in the system, but because of politics. Richard Nixon, like George W. Bush, was under pressure to do something about American’s balance of payments and trade deficits.
For the gold standard to work today, Washington has to keep the value of the dollar pegged to gold at a value—as previously mentioned—of $900 to $950 per ounce. In today’s modern markets, Washington doesn’t need piles of gold to maintain a gold standard. Nor does the government need to promise to exchange gold at a fixed rate for dollars. All the Federal Reserve Bank has to do is look at the market price of gold: if it moves outside a certain narrow range, the monetary authorities should react by either tightening or loosening the money supply.
Today many economists ridicule the gold standard as “crazy.” However, for centuries gold was the touchstone of money. From the days of Alexander Hamilton until the 1960s (except briefly in 1933–34), it was an article of faith that, barring a major war, the dollar should be fixed to gold in order to remain strong and stable.
The biggest objection to gold is that the fixed nature of the system restrains economic growth. But this thinking is based on the illusion that a central bank can create prosperity by running off more dollars. Another objection is that a major discovery could so increase the outstanding supply as to cause inflation. But experience demonstrates that even major finds such as the 1849 gold rush or the mammoth amounts of gold that Spain took out of Latin America led only to a mild increase in prices, and then not for very long. The disruptions of such discoveries are minimal compared to the damage politicians routinely wreak when a currency isn’t anchored to gold.
An additional argument against gold is that it caused the Great Depression. This is also a myth. As we noted, the Great Depression was the product of bad policy—the Smoot-Hawley Tariff. Gold was a victim of the resulting global trade wars. Amidst an atmosphere of heightened economic and political uncertainty, people around the world exchanged their currencies for gold. With government supplies under pressure, nations led by Great Britain broke the link to gold. Its central role was restored at the end of World War II with the creation of the gold-based Bretton Woods international monetary system.
President Richard Nixon blew up the system in 1971 because of concern over the nation’s increasing trade imbalance (remember, he and his advisers mistakenly thought an imbalance hurt the economy) and his declining poll numbers. So he succumbed to the temptation to try to “fix” the situation by devaluing the U.S. dollar. His unilateral abandonment of Bretton Woods and imposition of ninety-day wage and price controls were the “Nixon shocks.” They left the United States and the world economy reeling and set the stage for the stagflation of the 1970s. Sadly, George W. Bush and his administration did not learn from this Real World lesson. And Americans in 2008 paid the price.
REAL WORLD LESSON
Predictability and stability are necessary conditions for business investment in all markets. Stabilizing the dollar’s value through a tie with gold is the best way to create a stable foundation in currency markets and the global economy.
Q DOESN’T THE ECONOMIC CRISIS SUGGEST THE NEED FOR INTERNATIONAL REGULATION OF THE GLOBAL ECONOMY AND A SINGLE CURRENCY?
A NO. INCREASING “ONE-WORLD” CONTROL OF AMERICA’S ECONOMY MAKES THE UNITED STATES VULNERABLE TO THE POLITICAL INTERESTS OF OTHER NATIONS.
As the 2008 financial crisis spread to nations around the globe, world leaders like German chancellor Angela Merkel and British prime minister Gordon Brown called for more regulation of the global economy. Writing in the Washington Post, Brown suggested expanding the authority of the World Bank and the International Monetary Fund to allow close scrutiny and greater control of financial institutions. At the 2009 World Economic Forum in Davos, Switzerland, Merkel called for creation of a new international entity similar to the UN Security Council and “a new charter for a global economic order” to make sure such a severe worldwide financial crisis doesn’t happen again.47
Weeks later, before the G-20 economic summit, both China and Russia made another proposal—replacing the dollar as the world’s international reserve currency with International Monetary Fund-issued Special Drawing Rights (SDRs), a “globalized” currency under IMF control. It would be based on the values of a group of national currencies. The selling point was that it would not fluctuate as much as the dollar does today, providing a more stable global market for world business and investment.
Lofty-sounding proposals for world currencies and regulatory bodies carry the weight of high authority, especially when made by heads of state at global forums. But they’re no more likely to work in the Real World than any other bureaucratic solution that ignores markets.
If there is a Real World lesson to be learned from the present crisis, it is that regulation, from any source, is no guarantee of protection. The United States was once considered by the rest of the world to be a model of regulatory best practices, particularly with the capital markets. The Securities and Exchange Commission was a standard setter for securities regulation. But none of these vaunted regulatory practices were able to avert the financial crisis or Bernie Madoff’s massive fraud.
There was also plenty of regulatory warning about the coming mortgage-lending crisis in the United States. But as we’ve already noted, policy makers chose not to listen. If the United States, the font of entrepreneurial capitalism, can make ghastly regulatory mistakes, why should one assume that international bodies will do any better?
Merkel’s proposal of a UN-based financial regulator—a possible UN Economic Council—raises the question of what power such an institution would have and how it would actually function in the Real World. Would an international body really have
done a better job preventing U.S. banks from making dodgy mortgages than American regulators, who were on the scene and more familiar with local institutions? Are banks now to have two sets of auditors, one from their home country and another one from, say, Brussels?
Since 1988, the world banking system has had guidelines through the Basel Accords. The chancellor’s desire for an entity resembling the UN Security Council was especially ironic, since the real-life UN body is notorious for getting very little done, and then only after painful, time-consuming, and generally useless compromises.
This is not to say global organizations and agreements can’t be effective. Since World War II, the nations of the world have signed on to a succession of major agreements that, by reducing tariffs and regulatory barriers, facilitated an explosion in growth-producing world trade.
Two big successes have been the General Agreement on Tariffs and Trade (GATT) and the subsequent World Trade Organization (WTO). Countries that have joined the WTO adhere to these trade agreements and obey its rulings concerning trade disputes. The World Trade Organization works because, beneath the political maneuvering, countries know that reducing trade barriers and adhering to trade agreements and rulings is good for them and for peaceful global commerce.
Putting aside the fact that the regulatory ideas bandied about by the Merkels of the world are overwhelmingly vague, the truth is that existing international organizations do not have an untarnished track record. The World Bank, for example, has repeatedly been accused of corruption—lending untold billions to governments whose politicians have looted the treasuries of their own countries.
Do we really want to place our economic destiny in the hands of international bodies subject to the politics of other nations? Policy analyst Brett Schaefer of the Heritage Foundation believes “any international effort should be consultative and advisory, engaged in such matters as the development of best practices standards, rather than bent on establishing new international regulatory authorities possessed of dictatorial or coercive powers over such matters.”48
And what about the idea of a one-world currency? Ambassador Terry Miller, director of the Center for International Trade and Economics at the Heritage Foundation, rightly argues that it doesn’t solve anything—and may even make matters worse.49 For one thing, an IMF reserve currency has no intrinsic value. It has even less meaning to people in the world’s marketplace than today’s fiat dollar. World currency controlled by the International Monetary Fund would be vulnerable to even more political caprice than today’s fluctuating greenback. The supply and value of money would be subject to the political desires of nations around the world whose interests might not always be in line with our own.
There would be new opportunities for corruption. IMF procedures for setting the value of money and interest rates would be less transparent than those of the U.S. Federal Reserve Bank. They would involve other countries whose representatives have different political agendas and are not as accountable to an open grilling by America’s democratic government.
The best way to foster a healthy global economy is not through new global regulations or a single world currency, but through currencies that remain steady in value. Strong, stable currencies create a predictable environment that invites entrepreneurship and investment. Updating the gold-based Bretton Woods international monetary system, which served the world well from the end of World War II until the early 1970s, would go a long way toward ending economic volatility and restoring the stability sought by advocates of “one-world” economic solutions.
REAL WORLD LESSON
A new Bretton Woods-style monetary system based on a gold standard and stable currency is a better way to reduce global economic volatility than politicized, “one-world” solutions.
CHAPTER SEVEN
“Is Affordable Health Care Possible in a Free Market?”
THE RAP Today’s out-of-control healthcare costs are the consequence of increasingly sophisticated medical technology and growing patient demand, compounded by greed throughout the system. Insurance and pharmaceutical companies, doctors, and hospitals all care more about profits than about patients. The only way to fix these complex problems is through a government-designed system with mandatory health insurance. Otherwise, health care will become totally unaffordable and beyond the reach of the poor and the middle class.
THE REALITY Today’s healthcare system is a case study of what happens when government dominance prevents the market from working. Federal policies have locked in a system of “third-party pay.” The result is that you, the individual consumer, rarely directly pay for your medical care or insurance. Employers and insurers are the ones making the buying decisions. The market is therefore about meeting the needs of big companies and not those of the individual. Policy reforms allowing consumers to take charge of healthcare buying decisions would correct this market distortion. Healthcare and insurance providers seeking your business would lower prices, provide better service, and become more accountable.
American health care is the best in the world. Thanks to high-quality medicines and technologies, Americans have higher survival rates for illnesses ranging from cancer to heart disease. America leads the world in new drug development. We have greater access to care and advanced medical technology than patients in other advanced nations. The quality of U.S. health care draws people from countries with staterun healthcare systems, who come seeking the best care medicine has to offer.
Some people who buy into the Rap on capitalism believe America’s expensive advanced drugs and technology are a major reason that a “free market” simply can’t work in health care. It’s simply too expensive. They blame capitalism—namely, “greed” on the part of insurance and drug companies—for what they call “the healthcare crisis” of upwardly spiraling medical and insurance costs. They’re wrong. The problem in today’s healthcare market is not too much capitalism, but too little.
Our system has very real problems. Between 2004 and 2008, the cost of health-insurance premiums has skyrocketed by some 27 percent. Since 1999, it has increased a startling 119 percent. The average annual cost for an individual plan is rapidly approaching five thousand dollars, while the cost of a family policy is nearly thirteen thousand dollars. These staggering premiums are blamed for the existence of an estimated forty-six million uninsured Americans.
Not only the uninsured feel abused by the system. In 2008 the nation was riveted by the story of seventeen-year-old leukemia patient Nataline Sarkisyan, whose request for a liver transplant was denied by her insurer, CIGNA Health Care, on grounds that the procedure was too experimental. After headline-making demonstrations and calls from politicians, CIGNA eventually agreed to pay for the operation. Tragically, Sarkisyan died before it could take place.
More common is the story of fifty-four-year-old Tod Smith. The Connecticut children’s book illustrator was denied coverage for forty thousand dollars in medical bills after his first heart attack. Smith was forced to sue his insurer, Assurant Health, after it claimed that his “angina episode” was a preexisting condition. Other people, meanwhile, are often stunned to discover their insurance doesn’t fully cover expensive prescription drugs, which can reach six figures a year for the most costly medications.
Meanwhile, the quality of medical care seems to grow increasingly cold and impersonal. The house calls and personalized care of the 1950s and ’60s are a distant memory. Patients endure hurried treatment by physicians and hospitals under cost pressure by insurers—or unnecessary testing by healthcare professionals practicing “defensive medicine” out of fear of malpractice suits.
The combined pressures of low insurance reimbursement and increasing malpractice litigation are creating an unsustainable burden on physicians. Typical is Dr. Matthew Allaway, a urologist in rural Maryland who, according to the Baltimore Sun, starts at 7:00 a.m. and often sees as many as sixty patients a day in order to make ends meet. His office is often packed, with waits of up to ninety minutes. The reason:
many colleagues have left the profession.
Little wonder so many people believe the system is a chaotic mess. Capitalism bashers are convinced that a Canadian-or European-style, government-run system is the only way to fix these problems.
They should think again. Many people blame today’s healthcare troubles on “greed” on the part of drug and insurance companies, and even some doctors. However, they miss a critical Real World truth: America’s healthcare system is anything but a “free market.” It is the nation’s most heavily regulated economic sector.
What people today call the “healthcare crisis” is actually a massive economic imbalance created by bad government policy.
Today’s health care can definitely be expensive and uncaring. That’s because, as we pointed out, the patient really isn’t the customer. The real customers are corporations: the employers that buy coverage from insurance companies—and the insurers that reimburse doctors and hospitals.
Remember, in a marketplace, people and companies seek to satisfy the needs and wants of their customers. Today’s healthcare system is about satisfying the needs of employers and insurers that are the primary customers—not your needs. In Milton Friedman’s words, “The [physician] has become, in effect, an employee of the insurance company or, in the case of Medicare and Medicaid, of the government.”1
Third-party payment has also driven up costs by artificially boosting the use of healthcare services. The late Milton Friedman once put it very simply: “The patient—the recipient of the medical care—has little or no incentive to be concerned about the cost since it’s somebody else’s money.”2 Insurance may be expensive. But for people who have it, doctor’s visits can seem “free.” Patients end up making more visits to the doctor’s office. Everyone knows what happens in the Real World when demand for anything goes up. Prices do, too. Health care is no different.
