Correction to This Article
This op-ed on former senator Phil Gramm's recent remarks on the economy referred to him incorrectly as a former chairman of the Senate Finance Committee. He chaired the Senate Banking Committee.

Phil Gramm Is Right

By Amity Shlaes
Saturday, July 12, 2008

"In serious consideration for ambassador to Belarus." That's the role John McCain joked that former senator Phil Gramm might have in a McCain administration. Gramm is McCain's most senior economic adviser, the one best qualified to lead the finance team of a McCain presidency. Now, however, Gramm faces political exile because he made the mistake of telling the truth.

What prompted the abrupt demotion? The short answer is what might be called Campaign Econ. Campaign Econ says the American economy is a certain way because Americans think it is. Campaign Econ competes with real economics and often wins -- with damage that extends way beyond, say, the political career of either Phil Gramm or John McCain.

Consider what happened this week. While speaking with the Washington Times, Gramm said that the country was not in a true recession but a "mental recession." He also said, "We have sort of become a nation of whiners" and "You just hear this constant whining, complaining about a loss of competitiveness, America in decline."

Gramm was right about the recession and stood by his recession comments on Thursday. A recession is two consecutive quarters in which the economy shrinks, and last quarter it grew. But no matter. Voters feel they are in a recession, and so they are, at least according to Campaign Econ.

Gramm's second sin was political. Calling voters whiners is to shame them. He later rephrased this comment, saying it was not voters he meant but politicians. That's because shaming voters is something American politicians simply don't do. Campaign Econ is unabashedly populist, and to seek to elicit shame is regarded as unpardonably elitist. Earlier this year, the McCain team was already terrified of seeming elitist. His advisers convinced themselves that the closeness of the primary contest was due to a lack of generosity. In January, when the McCain folks were desperate to win the Michigan primary, they ground their teeth down as Mitt Romney pandered to the auto industry. Romney's promise of unlimited support for carmakers won him that primary -- but not the nomination. Still, since then, McCain's advisers have sought to prove that he understands Campaign Econ; consider their proposal of a summer gas tax holiday.

That Campaign Econ is also calibrating Barack Obama's economic team goes without saying. The view among the nation's political advisers, from far left to far right, is that the economy is in a Katrina. Anyone who disagrees has no role in the 2008 presidential contest.

Campaign Econ is certainly understandable. Gas prices are ruining vacation plans and killing businesses. Many Americans have lost or are about to lose their homes to foreclosure or in distress sales. The federal government may not be talking about it much yet, but inflation plagues the country. The weak dollar is altering our everyday calculations. For many, this is not a happy summer.

Still, to liken the current moment to the Great Depression, or even the early 1980s, as Campaign Economists have, is to whine, just as Gramm said. During the Depression, people lost their homes even though they had borrowed only 10 percent of the purchase price. People losing their homes today frequently have borrowed 90 percent or more. The country approached double-digit unemployment in the early 1980s. This week, even as McCain was trying to talk his campaign past Gramm's comments, joblessness stood at a historically modest 5.5 percent.

And Campaign Econ has costs. The first is that talk of a downturn -- or "mental recession," as Gramm put -- can itself generate a downturn. Keynesian economists say this is so because consumer spending slows when people are afraid. But there's also a non-Keynesian dynamic. Grumbling leads to costly government rescues that scare markets and slow growth.

Second, as evidenced by the plummeting prices of Fannie Mae and Freddie Mac shares, serious trouble may be closer than we think. The plunging stock of the government-sponsored mortgage companies reminds us that those entities urgently require restructuring. Wall Street figures and the Senate Finance Committee that Gramm used to chair are already talking about how to structure a bailout. But this task is about stopping recession, not luxuriating in it.

Social Security and Medicare also need rewriting -- and Gramm put forth one of the better proposals on Social Security in the 1990s.

In short, to fix it all, we need a frank conversation about the economy. McCain, in fact, inaugurated one back in 2006 when he gave a speech that was downright Gramm-like at the Economic Club of New York.

In that speech, McCain said that on entitlements, hard choices were necessary. He concluded: "Any politician who tells you otherwise, Democrat or Republican, is lying."

This was McCain at his best. Many voters knew it, too.

The way to strengthen the economy right now is to elect leaders who dare to talk about problems in precise and even technical terms -- and then act on them. McCain has that capacity, but only if he can transcend Campaign Econ.

Amity Shlaes is a senior fellow in economic history at the Council on Foreign Relations and the author of "The Forgotten Man." She recently spoke at a meeting hosted by the Mercatus Center and the Texas Public Policy Foundation, which is chaired by Wendy Gramm, wife of Phil Gramm.

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