By W.A. Wijewardena –

Dr W.A. Wijewardena

The self-taught economist

Ron Paul, libertarian to the end and US Congressman for 23 years out of a 35 year long political career, retired from active politics end-last year at the age of 78. He tried nomination for the US Presidency thrice unsuccessfully, the last being the just concluded Presidential election in 2012.

Though he was a physician by profession, he taught himself economics in the hard way, laboriously reading practically every book on economics. In that sense, he is a good example for Sri Lanka’s Parliamentarians and budding politicians to emulate. But it was the liberal free market economy system that was propounded by the Austrian school of economics, chiefly Ludwig von Mises, Friedrich Hayek and Murray Rothbard, and the Russian Émigré and novelist Ayn Rand that kindled his curiosity in the subject and was responsible for making him a solid convert to the doctrine. He is the author of six bestselling books on popular subjects in economics. Starting with The Case for Gold in 1982, he published a series of books announcing his philosophy of socio-political-economics to the readers: A Foreign Policy of Freedom (2007), Pillars of Prosperity (2008), The Revolution: A Manifesto (2008), End the Fed (2009) and finally Liberty Defined (2011). With a sound knowledge of how an economy works in a practical sense, he did not hesitate to argue in live TV debates with giants in economics, one being the Nobel Laureate Paul Krugman. Another Nobel Laureate Joseph Stiglitz, though in the camp opposite to Ron Paul’s, had agreed with him when he said that a central bank was not needed for the prosperity of a country.

A master debater

Ron Paul’s ability to engage in debates has been remarkable. In one of the TV debates Paul Krugman tried to ridicule him saying that he was trying to take USA back to 150 years ago. To this, Ron Paul’s quick response was that Krugman, with his government expansionist policy, was trying to take USA 1000 years backward. His reference was to the Roman Empire which had a lot of government intervention in the economy leading eventually to its demise (available here).

Departing advice to the US Congress

Ron Paul’s departing advice to the US Congress has been made in two speeches, both of which are reproduced in his website, www.ronpaul.com . The first one is his farewell speech delivered on 14 November 2012 and the second one is his New Year’s Message to the Congress made on 28 December 2012.

In his farewell speech, he has attributed the ongoing economic and financial crisis in USA to the wrong policies which the country had pursued toward the latter part of the 20^th century. He has opined that those policies have engulfed USA in a foreign policy that would overextend the country and undermine its national security. The overextension means that it is beyond the country’s ability and resources; undermining national security means that it has provoked many enemies of USA needing it to spend more and more resources for national defence which of course is at the expense of the future economic prosperity. Hence, one should start at one point to reverse the ominous trend and make USA a beneficial partner of global growth and not a hated enemy.

Ron Paul prescription: Make the government small

To take the country out of the crisis, Ron Paul has prescribed several key measures. He has said that the “government would have had to shrink in size and scope, reduce spending, change the monetary system, and reject the unsustainable costs of policing the world and expanding the American Empire”. As such, while upholding his own liberty, he has been respectful of the liberty of all other nations in an interdependent global economy.

The recent resolution of US fiscal cliff is just a white wash

The current fiscal cliff which USA has been facing has been due to its not following the prescriptions suggested by Ron Paul. Though Obama Administration has managed to postpone the problem by reaching a compromise on some of the issues with the rebellious Republicans, USA is not cured of the ailment fully. As some of the mainstream economists have told The Wall Street Journal on 2 January 2013, the fiscal cliff deal is short of the economic policy reforms which USA has to implement in order to come out of the problem clean (available here). The issues which are yet to be sorted are the increase in the US Government’s borrowing limit from the current $ 16.4 trillion and the automatic across-the-board-cut in spending by government agencies by 10 per cent known as sequestration. Sequestration is a term borrowed from legal applications where an asset in dispute is kept in safe custody to prevent it being misused or misappropriated until its fate is decided by courts of law. In US budget sense, it means that the US Treasury has powers to automatically keep aside any money appropriated to a government agency but not utilised for its purposes. Hence, it is an automatic spending restraint helping USA to tame its budget deficits.

Ron Paul: Attack the root cause of ailment

Even with a proper resolution of these two outstanding issues, what the fiscal cliff negotiations have done is to address only the symptoms of the ailment and not attacking the root-cause as diagnosed by Ron Paul.

Ron Paul’s prescription that the size and the scope of the government should be reduced along with a cut in government spending has run into conflict, at least when an economy is in recession, with public policy advocates who favour an active role for the government to stimulate an economy. They argue, following the policy prescriptions made by the British economist John Maynard Keynes in early 20^th century, that it is the government which is best suited to stabilise an economy when it is below or above the potential growth path.

High super growth rates are also an evil

When an economy is above the growth path recording super economic growth rates, as has been experienced by China and India recently, such high growth becomes short-lived because the rising demand will overheat an economy leading to inflation and wage increases on the one hand and a rapid wear-out of the available resources – both human and physical – on the other causing an abrupt end to the high growth momentum. This is what is happening to Sri Lanka today. Hence, public policy advocates argue that the government should step in and do exactly what Ron Paul has prescribed: Cut government spending, reduce budget deficits and go for a reduction of the growth rate so that you save the day for future growth.

Recessions attract government activism

When the economy is below the potential growth path, demonstrating economic recession, policy advocates argue for policies which are exactly opposite to what Ron Paul has prescribed. They maintain that the recession has been caused by a deficiency in the demand and that deficiency could be corrected by the government by stepping up its spending which, in today’s economic parlance, is known as offering economic stimulus packages. The spending can be financed by governments by borrowing from the domestic economy (and thereby activating the supposedly idle savings with private people), borrowing from abroad (and thereby getting the savings of foreigners to raise the level of demand in the domestic economy) or by getting the country’s central bank to print new money and offer stimulus packages (and thereby getting new money into the hands of the people to spend).

TV debate with Paul Krugman

Thus, public policy advocates argue that a government can tame an economy that runs high and push up an economy that staggers by adopting exactly the policies counter to the prevailing economic conditions. These are known as counter-cyclical policies. The debate between Ron Paul and Paul Krugman on Bloomberg TV in May 2012 has been on the validity of this wisdom (available here). Ron Paul has argued for a small government and Krugman has argued for an activist government to push up the economy and create prosperity. When Krugman supports having a small inflation to stimulate an economy, Ron Paul says that inflation, whether it is low or high, is a theft of the private savings and theft is a crime. Ron Paul says that the Federal Reserve Bank (The US central Bank) which has reduced the value of the dollar by 98 per cent since its inception in 1913 through inflation has committed the gravest fraud; anyone in the private sector committing a fraud will go to jail whereas those in the Federal Reserve Bank just escape unpunished. The implication of what Ron Paul has said is disastrous.  That is, those in the Federal Reserve Bank or in any central bank have all the incentives to steal the savings of the people through inflation because they can go scot-free. The history of central banking throughout the globe has vindicated Ron Paul.

Ron Paul: End the Fed

But, is Ron Paul justified when he attacks central banks? Since today’s economies are monetary economies, can a society function without a central bank which will guarantee the availability of the means of payments at a reasonable cost to people? The answers to these questions are found in Ron Paul’s 2009 book “End the Fed” and the criticisms by reviewers against the main theme of that book. Ron Paul has leveled his criticism against the US Federal Reserve Bank specifically and the concept of central banking or government’s holding monopoly power over issuing money in general. The US Fed, according to him, is corrupt, works for the benefit of the big businesses forgetting the common man and has been an instrument of passing the losses of businesses on to society (socialising losses) and allowing businesses to enjoy profits (privatisng profits). By reducing the value of the dollar through overprinting, it also imposes a hidden tax, a regressive tax on people, because it falls on the low income groups more heavily than on the high income earners. His objection to general central banking is that he has found a historical link between the creation of central banks and waging wars by countries. His criticism has been that both inflation and devaluations have been used in the past as tools to finance wars by governments. He argues that central bankers, through the adoption of monetary policy measures, have become central economic planners and such central planning is doomed to fail as it has happened in the former Soviet Union.

Critics of central banks

Ron Paul is not alone in having this view of central banks. Nobel Laureate Friedrich Hayek argued in his 1978 book, “Denationalisation of Money” that the monopoly power vested with central banks to issue currency should be taken away because they have failed to maintain the value of the currency they produce. Hence, the money issuing power should be denationalised and private sector be allowed to produce its own currency in a competitive manner. Another Nobel Laureate, Milton Friedman, argued that society is better served if the Federal Reserve Bank is closed down and the keys are dropped to the Atlantic Ocean so that no one would be able to reopen it.

Critics say Ron Paul is a utopian

But James Pressley, writing to Bloomberg News, has argued that Ron Paul is wrong for all the right reasons, because his prescription is utopian and cannot work in a modern economy (available here). Pressley says that even before the creation of central banks, economies have not been stable, markets are not that efficient to rely on them for producing worthy money, people’s savings cannot be placed in the custody of irresponsible marketers and ending a central bank only in one country may be like unilateral disarmament when the other countries are arming themselves. Hence, Ron Paul’s views on central banking are somewhat extremistic, according to critics.

Big governments restrict human liberty

Ron Paul’s main attack has been on the large government. In his farewell speech, he has said that the modern society has dependency of the government largesse for every need. Though he refers to USA, it applies to Sri Lanka and all other countries. When the government becomes large and seeks to cover all areas of human life, it invariably leads to the restriction of human liberties. The danger is that, then, the government starts operating outside the Rule of Law protecting and rewarding, according to him, those who buy or coerce governments to satisfying their needs. He gives a number of examples for governments operating outside the Rule of Law. Undeclared wars are commonplace. Wars are with their own citizens and with other nations. Welfare for both the rich and the poor is considered an entitlement thereby paving way for bigger governments. The economy is overregulated and overtaxed. With each regulation and each piece of taxation, the government becomes still bigger. It then leads to increases in public debt in exponential terms. Ron Paul says that the US government resorts to preventive wars, which are simply aggressions of other nations with no complaints from the US citizens. The drone warfare which USA engages itself in other countries has killed many innocent and untargeted people earning a bad name and hatred for the country. Economic sanctions are imposed on countries that do not follow the US line in world affairs. The sum total of all this is a large government and a large government is a restriction of human liberty which is necessary for durable economic prosperity.

Justification of big government on humanitarian grounds

Ron Paul attacks the large and irresponsible governments from another side. He says that because people are ignorant of even the basic economic fundamentals, the governments use that ignorance to their advantage. While promoting a large government as a necessity, those who support the government action always justify it on humanitarian grounds. Accordingly, Ron Paul says that “humanitarian arguments are always used to justify government mandates related to the economy, monetary policy, foreign policy, and personal liberty.  This is on purpose to make it more difficult to challenge.  But, initiating violence for humanitarian reasons is still violence.  Good intentions are no excuse and are just as harmful as when people use force with bad intentions.  The results are always negative”

Legalising violence is not good

Ron Paul criticises those who use force to change the world, whether in the domestic economy or outside. He specifically says that “sadly, many religious groups, secular organizations, and psychopathic authoritarians endorse government initiated force to change the world.  Even when the desired goals are well-intentioned—or especially when well-intentioned—the results are dismal.  The good results sought never materialize.  The new problems created require even more government force as a solution.  The net result is institutionalizing government initiated violence and morally justifying it on humanitarian grounds”.

He therefore condemns the legalising violence through legislation and empowering the government agencies to use that violence on citizens. He concludes the farewell address with a dictum which is similar to what Emperor Asoka practised 2300 years ago not by word but by deed. Ron Paul says that “The best chance for achieving peace and prosperity, for the maximum number of people world-wide, is to pursue the cause of LIBERTY”

People’s representatives should not bow to pressures

In his New Year message, Ron Paul has advised the people’s representatives to protect the constitution which they have pledged to do when they took the oath as members of the Congress. He then says that “Most legislation violates key provisions of the Constitution in very basic ways, and if members can’t bring themselves to say “no” in the face of pressure from the special interests, they have broken trust with their constituents and violated their oath. Congress does not exist to serve the special interests. It exists to protect the rule of law”

This piece of advice from an experienced US legislator is the most relevant to Sri Lanka today.

*Writer is a former Deputy Governor – Central Bank of Sri Lanka and teaches Development Economics at the University of Sri Jayewardenepura. This article first appeared in Daily FT  – W.A. Wijewardena can be reached at waw1949@gmail.com