Brave Thinkers November 2010

The Tea Party’s Brain

One way to measure the surprising rightward political lurch of the past two years and rise of the Tea Party is to chart the relative position of Ron Paul, who has never flinched from his beliefs. He’s not alone anymore.

One of Paul’s earliest acts of iconoclasm also turned out to be his wisest. In 1976, he bucked the Republican Party in Texas, which had fallen in line behind Gerald Ford, to head the state’s delegation for Reagan. “This was the leading edge of the Reagan Revolution,” says Mark Elam, who was at the time a student founder of Young Conservatives for Texas, and later went to work for Paul. “Reagan almost knocked off Ford, and that became the genesis of the conservative movement.” Paul and Reagan became friends. When Reagan ran again in 1980, Paul supported him. “There is a famous photograph of the four Texas Republicans [in Congress] and Reagan on Air Force One,” Elam told me. “That was all we had in those days.”

It wasn’t just Reagan’s conservatism that appealed to Paul. He thought he detected Misesian tendencies and could persuade the new president to return to the gold standard. “Reagan was open to it—he told me, ‘A country doesn’t remain great if it gets off the gold standard,’” Paul recalled wistfully. “But his advisers wouldn’t let him.”

Although Paul’s bills to revive the gold standard failed, a rare success came in 1982, when he got Congress to create the U.S. Gold Commission. It considered, but did not endorse, the gold standard—although it did pave the way for the U.S. Mint to begin coining gold again, which Franklin Roosevelt had halted to stem Depression-era bank panics. (Paul has had to settle for a personal gold standard. Financial-disclosure filings reveal that he owns as much as $1.5 million worth of shares in gold-mining companies, so skeptical is he of the dollar.)

Paul is a shrewder politician than he’s given credit for. Early on, he branded himself “the taxpayer’s best friend.” When, in the early 1980s, his isolationism threatened to cost him his seat, Paul came up with a showstopper. In a videotaped campaign ad mailed to Republicans throughout his district, Ronald Reagan offered this endorsement: “Ron Paul is one of the outstanding leaders fighting for a stronger national defense. As a former Air Force officer, he knows well the needs of our armed forces, and he has always put them first.”

In 1984, a Senate seat came open, and Paul decided to pursue it. He suffered a stinging loss in the Republican primary to Phil Gramm (an economist!), and then abandoned electoral politics. “I think he was a bit disappointed that Reagan did not accomplish more,” Elam says.

He returned to medicine and to his true love, economics. In 1976 he had founded a nonprofit, the Foundation for Rational Economics and Education, that published newsletters under his name, and after his defeat, he turned to them in earnest. The newsletters carried urgent titles like The Ron Paul Survival Report, and were generally devoted to the glories of the market and the menace of the Federal Reserve. They claimed more than 100,000 readers. (During the 2008 presidential campaign, The New Republic highlighted vile racism and homophobia that had appeared in their pages. Paul professed ignorance, but refused to say who had written the material.)

Paul made a quixotic return to politics in 1988 as the Libertarian Party’s presidential candidate, placing a distant third. And then, after the Republican congressional landslide in 1994, he got the bug again. Through DeLay, he appealed for his old party’s support to unseat the Democratic incumbent in the district next door to his old one. Instead, Republican leaders got the Democrat, Greg Laughlin, to switch parties. Paul ran anyway. He drew on a national network of newsletter subscribers, libertarian activists, gold bugs, and other believers to vastly outspend Laughlin, despite Laughlin’s access to the GOP’s national donor base. Paul’s campaign, fueled as it was by an army of small donors, prefigured the Internet campaigns that would come later. He shocked everyone by winning.

But in Washington, Paul was out of step with the times—an isolationist as neoconservatism took over his party, a sworn foe of central banking when Alan Greenspan was being celebrated as “The Oracle,” a fiscal conservative overpowered by Karl Rove’s attempt to build a lasting Republican majority by buying off key interest groups with new government benefits.

Paul’s independent streak put him at odds with a Republican leadership that ran Congress like a Tammany Hall machine and punished anyone who strayed. Paul strayed habitually. In 2003, his seniority put him in line to chair the subcommittee that oversees the Federal Reserve. To deny him, Republican leaders merged two committees. In 2005, he was again set to assume the top spot. With another merger impossible, a senior colleague was pressured onto the subcommittee so that she, and not Paul, would take the gavel.

“They look at him as a problem,” says Representative Barney Frank, the Massachusetts Democrat who chairs the Financial Services Committee and co-sponsored bills with Paul legalizing marijuana and Internet gambling. “Ron said to me in 2005, ‘I guess I’ll have to wait for you to be chairman, because we never get anywhere around here.’”

Then everything changed. The housing bubble burst, banks stopped lending, and the Federal Reserve became an object of contempt. It was the world Ron Paul had prophesied, and he had a seductive story to tell about why it had happened—the Austrian story.

The Federal Reserve, in its hubris, had thought it could goose the economy and mitigate the effects of a post-9/11 recession by holding interest rates low, he explained. But tampering with money had sown disaster, just as Mises had warned. Easy credit had fueled massive amounts of what the Austrians called “malinvestment”—badly allocated investments, in this case in the overproduction of houses and automobiles. Only no one recognized this, because the true value of money had been distorted. Now the reckoning had arrived.

For his devotion to Austrian economics, Paul was always seen as slightly aberrant, in the same way that he might have been if he were, say, a practicing Druid. The Austrian school had peaked in the early 20th century but had fallen away after the Great Depression, which it claimed was caused by an expansion of the money supply and could be met only with chastened submission as the market corrected itself. Herbert Hoover’s Treasury secretary, Andrew Mellon, offered similar counsel, famously urging Hoover to “liquidate” and “purge the rottenness out of the system.” But this failed to stop the catastrophe. Only when Roosevelt took the dollar off the gold standard and committed to deficit spending, and the Fed adopted consistently low interest rates, did the economy finally start to recover. This validated the argument of the Austrians’ intellectual adversaries, economists like John Maynard Keynes, that rather than stand aside, governments should intervene to mitigate recessions.

Most mainstream economists today accept Keynes’s prescription. Many of them regard Austrian theory as charlatanism—in the words of Paul Krugman, “as worthy of serious study as the phlogiston theory of fire.” The reason is that the Austrian response to a recession—liquidation and austerity, falling wages and prices—allows enormous, and unnecessary, damage to the economy. Among other things, it has no answer for the problem of unemployment—and, by forsaking any attempt to prop up aggregate demand, probably worsens it.

Though Paul could claim prescience for having warned of the crisis and became a sought-after financial commentator, he did not win the policy debate, at least not inside the government. Both the Bush and Obama administrations fought the crisis with deficit-funded fiscal stimulus, bailouts, and a broad easing of credit: the classic Keynesian weapons.

But the debate didn’t end there. The public’s response to the interventions in the economy was widespread revulsion. Whole swaths of people seemed to undergo something like what Paul had experienced in reaction to Nixon’s interventions in 1971: they became radicalized. “They saw that everyone was panicked to bail out the big guys and stick it to the little guys,” Paul says. “The Tea Party message is, they’re tired of it.”

Rage at the bailouts has already cost incumbents in both parties their seats. It’s put the fear of God into party leaders like Senator Mitch McConnell of Kentucky, the Republican leader, who, upon casting his vote for the bailout two years ago, called it “one of the finer moments in the Senate,” and must desperately wish he had not. McConnell has been vigorously criticized by the conservative grass roots, and a sign of what may be in store for him came in May, when his choice for Kentucky’s open Senate seat was thrashed in the Republican primary by Rand Paul.

Most experts think the government’s intervention was, technically speaking, successful (although probably too small). A recent study by the economists Alan Blinder and Mark Zandi concluded that it likely prevented a depression and saved 8.5 million jobs. A Congressional Budget Office study reached a similar conclusion. In other words, the intervention validated Keynes.

But lingering high unemployment and economic weakness, along with the relentless Republican effort to undermine Obama, have led most people to conclude the opposite, that Keynesian intervention failed. That’s had a profound impact in Washington, where further stimulus looks impossible even though the recovery has faltered and many Democrats (and investors) would like one. Tea Party outrage appears to have ended the Keynesian consensus that had obtained since the Great Depression. Republicans may not identify as Misesians, but as they rediscover their old obsessions with deficits, tax cuts, and inflation, they sound like they’re in deep philosophical accord. “Too many are searching for answers in the discredited economic playbook of borrow-and-spend Keynesian policies,” Representative Paul Ryan of Wisconsin, an influential Republican on economic matters, said recently. “I reject the false premise that only forceful and sustained government intervention in the economy can secure this country’s renewed prosperity.”

All of this is highly encouraging to Paul, because it reopens the debate about the Great Depression, a debate most people considered settled. Once consigned to the fringe, his ideas about economics have shaped an election that will determine future economic policy. If there’s another recession, the response will be much different.

A week after the Friendswood Fourth of July parade, Paul went to Galveston to speak at a job fair held by a local community-service organization in a sprawling convention center. Outside, satellite trucks and television crews were setting up in anticipation of the oil rumored to be washing ashore. Inside, people crowded into the lobby, some of them oil workers idled by the offshore-drilling moratorium. Booths for local businesses and charitable organizations lined the walls. The local Tea Party chapter also ran a booth. Paul delivered some words of praise for the volunteers and acknowledged the hardships brought on by the recession. Afterward, I asked him to explain how he would tackle unemployment, since the Austrians’ response had cost them during the Depression. Paul first made clear that he sympathized with the jobless, who were not to blame for their plight. “Unemployment is a creature of government intervention,” he said. “They’re victims of the intellectuals, like Keynes and Krugman.” But unemployment was, he agreed, a real problem. “Once you get it, you’re really in a pickle.”

What would his plan be? “It would be the opposite of what they’re doing,” he said. “You would not increase spending, you would not increase taxes, you would not bail out anybody. You would have bankruptcy, liquidation of debt, and [you’d] wipe the books clean so everybody can go back to work.” Rather than prop up demand, which contracts in a recession as businesses and consumers cut back, Paul would let the economy shrink until it began growing again. He cited the short (but severe) recession of 1920–21, when mass bankruptcies swept the country and prices fell by a third, to argue that if Bush and Obama had stood aside, the economy would already have returned to full capacity.

Paul kept returning to the stern moral logic at the heart of his worldview: that recessions are the price paid for a boom, that any attempt to fight them is hubris, and that “liquidationism,” far from having failed during the Depression, was denied a proper chance. Twice before, Paul has felt the country was on the cusp of a conservative age: in 1980 with Ronald Reagan and in 1994 with the Republican Congress. Both times, he was disappointed. He thinks another such moment could be at hand—and that conservatism might triumph this time, because the impetus is coming from outside Washington. His ideas are spreading. “Politicians are only a reflection of the intellectual climate,” he told me. “The Tea Party people are sending the right message.”

Paul says he hasn’t decided whether he’ll run for president again. But it’s hard to believe he won’t. He has emerged as a force at the kind of insider events that once ignored him. After winning the straw poll at the Conservative Political Action Conference in February, he came within a single vote of repeating the feat two months later at the Southern Republican Leadership Conference. In June, he traveled to Iowa to raise money for local politicians, which is what you do when you’re thinking about running for president. He was greeted with President Ron Paul 2012 signs.

It does not seem at all far-fetched to think that Paul could have a much greater impact on the race than last time. The Republican primaries are sure to be about economic and size-of-government issues. The subject that hurt him last time, foreign policy, will probably take a backseat. Paul will not lack for resources, thanks to his legion of online donors. Reagan, the Republican hero, once endorsed him. And the party’s energy right now is at the grass roots, which also bodes well for him. If his economic message connects in Iowa and New Hampshire—well, who can say?

Meanwhile, the country is losing faith in its economic leaders. “I feel really good about what’s happening,” he told me. “I never dreamed of a day when so many people would be thinking about the Federal Reserve. I can draw crowds of thousands! The first time I mentioned Austrian economics when I spoke at the University of Michigan, they started to applaud. I thought, What in thunder is happening? What’s happening is, the education is occurring.”

Paul looked rapturous, and he leaned forward. “Two years ago,” he said, “if you’d had somebody come in and do what you should do on the recession, they’d probably be impeached in a week. But attitudes are changing—people are understanding economics differently.”

Presented by

Joshua Green is an Atlantic senior editor.

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