Is the Gold Standard Coming Back?
WHY YOU SHOULD CARE
Because we could be in for an economic roller-coaster ride.
With the stock market shattering records and unemployment remaining low, the early days of the Donald Trump administration have been sunny for the American economy writ large. But there are storm clouds looming, some of which the unpredictable new president could cause and some he can do little to avert.
OZY recently spoke with Kenneth Rogoff, who served from 2001 to 2003 as chief economist for the International Monetary Fund, to sort through what lies ahead. One of the world’s leading economists, Rogoff serves on an advisory panel to the Federal Reserve Bank of New York and is a professor at Harvard University. This interview has been edited and condensed.
How much credit does Trump deserve for the Dow hitting 20,000?
A little bit. The economy was doing well anyway and had some momentum, but there’s clearly a lot of enthusiasm in the business community about his deregulation, corporate tax reform and infrastructure spending. Whether that will dampen as businesses start to get nervous about his daily tweets, I don’t know.
There are influential Republicans in Congress who have very populist views and want to return to the gold standard, for example, which is a completely idiotic idea.
What have you seen from Trump’s early moves that gives you optimism?
So, I think [that] long run it’s hard to see how this can go well, but for the next couple of years, the economy does seem to be on a strong path — and again, starting with the fact that it already had a lot of momentum. Trump campaigned on saying how terrible the economy was, but almost everything going on now has to do with things President Obama did, except maybe something like the stock market, where it’s more forward-looking. But the deregulation I think is significant. Again, this is short-run gain, long-run pain. If you eliminate restrictions on fracking, you may lose the water table in the Midwest more quickly; you may have earthquakes in Oklahoma. If you suspend or sort of reverse course on labor regulations, it might be good for business in the short run, but bad for inequality and not necessarily good for workers. That said, it is true that the regulations came in pretty fast and furious in the last couple of years when President Obama was frustrated with Congress, and there probably has been some regulatory overreach. There’s some readjustment that needed to be made.
What have you seen that gives you pause?
The trade policy is nuts. Let’s start out with the North American Free Trade Agreement. Going after NAFTA is totally ridiculous. Most of what Americans are feeling comes from China and technology, not from trade with Mexico. Obviously, undermining NAFTA undercuts the government in Mexico, destabilizes our southern border, and it’s not clear what we get out of it.
The White House seemed to back off after floating a 20 percent tariff on Mexico, but what would a “border adjustment” scheme mean, more broadly?
If we did a border adjustment that affected everything — an import tariff combined with an export subsidy — it is administratively very expensive and costly, but beyond that, the damage is not as great as policies directed at individual countries. It sounds like a big deal, but the fact is there would be an appreciation of the dollar that would offset a lot of the effects and make it not as damaging as it sounds.
We saw friction between Trump the candidate and Federal Reserve Board Chair Janet Yellen. Is such tension normal?
It is. Come on, that part of what he said about the Fed trying to help the sitting incumbent? The Fed didn’t. But that [comment] per se doesn’t worry me. I do worry about Fed independence, however. First of all, because [Trump is] likely to get to appoint a handful of governors [to the Fed] over the next two years. But more important, there are influential Republicans in Congress who have very populist views and want to return to the gold standard, for example, which is a completely idiotic idea, but nonetheless one favored by The Wall Street Journal’s editorial page. This would be much worse than Trump’s trade policies; it would be a disaster. It was the last time, and it will be again for the same reasons.
So you think returning to the gold standard is a real possibility under Trump?
Who knows? I found an interview where he sort of spoke favorably about it once. I could well imagine him appointing someone who favors it, which means they don’t understand monetary policy. My main concern is he puts in businesspeople who think they understand monetary policy but don’t. There’s quite a bit of evidence over the years that those people tend to perform particularly badly.
Do Trump and the Fed want different things when it comes to the economy?
We don’t know what he wants, to be honest. In the campaign he said he wanted to raise interest rates. One can presume [that] as someone in the construction industry he wants to keep interest rates low and he wants the economy to be strong.… For the moment, the Fed’s intact. It’s going to proceed raising interest rates cautiously, but I don’t think there will be overheating. I do think inflation will get up to 3 percent by 2018, because I think the Fed is going to be reluctant to be too aggressive given the uncertainties.
How much influence does presidential policy really have on the economy?
They surely get too much credit and too much blame. Obviously, Congress has an enormous amount of power, and the president’s actual power is limited. One of the things that, rightly or wrongly, has made business optimistic is that there’s more cohesion between Congress and the president than there was. Better to move in some direction than no direction at all, is what they think.