Monetary policy is dull, so the Republican Party’s bizarre advocacy of job-killing tight-money policies during a jobs crisis hasn’t gotten much attention. But political food fights are exciting, so today’s letter from GOP leaders pressuring Federal Reserve chairman Ben Bernanke not to approve more monetary stimulus is likely to get a lot of attention. The Fed is independent, and according to tradition, politicians aren’t supposed to try to push it around.
But why not? Politicians have every right to tell Bernanke what they think he should do. Bernanke has every right to ignore them. The Fed ought to be more central to our politics, not less. It’s our most important economic institution; the economy is our most important political issue. And the GOP’s ignorant and cynical efforts to prevent the Fed from juicing the economy before 2012 deserve a larger hearing.
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A quick primer for normal people who don’t follow monetary policy: The Fed has a dual mandate to stabilize prices and maximize employment. In general, tighter monetary policies reduce inflation and reduce employment, putting the brakes on the economy; looser policies apply the gas, increasing inflation and increasing employment. Right now, inflation is low and unemployment is appallingly high.
So those of us on the “dovish” side want the Fed to focus on promoting job creation, even if that means slightly higher inflation; as I’ve been writing for a year, a little inflation can be a good thing, because it encourages businesses to invest and hire rather than hoard their cash. For all the right-wing screeching about how President Obama and Bernanke are “debasing the currency,” core inflation is still less than half what it was during its lowest ebb during the term of the great inflation-basher Ronald Reagan.
But inflation hawks really don’t like inflation. Some hawks think a little inflation will inevitably lead to hyperinflation, as if the Fed would suddenly forget how to raise interest rates if the economy overheated. Some hawks don’t like inflation because it benefits borrowers (i.e., homeowners with mortgage debts, families with credit card debts, nations with $14 trillion debts) as opposed to banks and other creditors. And some inflation hawks just don’t want to stimulate the economy before the 2012 election. I’ll let the reader speculate which kind of arguments have attracted Senate Majority Leader Mitch McConnell, House Speaker John Boehner and the Republicans running for President to the hawkish side.
In fairness, the Fed has already gone to extraordinary lengths to loosen policy, lowering its key interest rate as low as it can go, blasting money into the banking system with two rounds of “quantitative easing.” And there is a reasonable case to be made that even looser policies might not help create that many jobs, that further monetary stimulus would just be pushing on a string, that fiscal stimulus from Congress would be a more effective way to promote growth. In fact, Bernanke himself—who is a Republican, although not the kind of hard-money, Hoover-was-right, Keynes-was-an-idiot Republican who dominates today’s GOP—has been fairly sympathetic to that case. But the GOP obviously isn’t arguing for more fiscal stimulus, and in recent years the inflation hawks have an impressively consistent record of being wrong about everything. Their pessimism has been wrong; easy money has not turned us into Zimbabwe, and foreign investors have not abandoned the dollar. And their optimism has been wrong; the economy has not been stable enough to flourish without Fed support.
Still, that doesn’t mean inflation-hawk politicians—even cynical inflation-hawk politicians whose hawkishness tends to disappear when Republicans occupy the White House—shouldn’t weigh in on Fed decisions. There’s this prudish notion that just because the Fed is an independent institution in its marble palace on Constitution Avenue, it’s bad form to try to pressure its governors. That’s crazy. It’s independent, but it ought to be accountable. The more its decisions are publicly debated, the better. Some Republicans want to eliminate the Fed’s dual mandate, so that it can only focus on inflation, not employment; I think that’s a horrible idea, and potentially terrible politics at a time of 9% unemployment. But it’s the kind of idea that belongs in the political arena.
Today, the Fed will start an unusual two-day meeting to consider options for further monetary stimulus. It won’t get nearly as much attention as President Obama’s jobs bill, but it’s got a much better chance of producing action that affects the economy, because Bernanke doesn’t need the Tea Party-controlled House of Representatives to approve his policies. Whatever the Fed decides will affect all of us.
In their letter, the Republicans warned that more monetary stimulus would weaken the dollar (which would boost exports) and promote more borrowing (which would boost the crippled housing market). They didn’t really make a case against looser policy, except the kind of the-economy-is-bad-QED arguments they’ve made against fiscal stimulus. But they’ve got every right to pressure the Fed. The other side should stop whining about Republican pressure and start applying its own.