GOP Wins; Bad Monetary Policy Will Get Worse?

A Benjamin Cole post

Being a Market Monetarist is unrewarding, and going to get worse, or so chortles The Wall Street Journal.

“Financial executives say a GOP-led Senate would ratchet up congressional scrutiny of the central bank’s interest-rate policies,” the WSJ reported Nov. 5.

In one of the more inexplicable political dementias of our time, the modern-day Republican Party has become fixated on inflation, and peevishly infatuated with tight-money policies—when not blubbering about gold.

The WSJ continues, “Many Republican lawmakers also want to…shift its focus more directly to inflation rather than inflation together with unemployment.”

Yes, inflation has been so run-away of late. Inflation is what we should worry about.

It gets worse.

“Many Republicans want Fed officials to move quickly now to raise interest rates from near zero and shrink the central bank’s balance sheet, which has climbed to near $4.5 trillion,” intones the WSJ.

There’s more, but I had to stop reading.

A Strange Spawn

As I have sketched in this space before, this GOP inflation monomania is newish; the Reaganauts and the Nixonians wanted expansionary monetary policies. The Reaganauts even talked about taking the Fed away from the Chairman Paul Volcker and sticking the central bankers into the Treasury Department, where they would answer to orders.

Times have changed. It is difficult to trace the genesis of this inflation-fixated GOP, but certainly it has reached its zenith in the days of President Obama. Some have cynically stated the GOP will become monetary expansionists and big spenders as soon as they control the White House again.

Maybe so. But maybe not.

The GOP Today

There is a saying that “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.” But in the case of the present iteration of the GOP, that is not true. They have refuted their guiding lights.

Perhaps it can be said the Founding Father of postwar right-wing economics is Milton Friedman, the great monetarist. Friedman argued for an intelligent central bank—but intelligent does not mean reflexively tight.

At least three times in his career Friedman flatly stated that overly tight money caused serious economic contractions—The Great Depression, the 1957 U.S. recession, and Japan’s Great Stagnation, post-1992. He wanted a more-expansionist monetary policy in those situations.

No GOP economist today can call for expansionary monetary policy, regardless of circumstance. It is not done, ever. A whole range of policy choices is simply verboten. (BTW, the Donk economists are just as bad; they want bigger and more deficits. Egads.)

As I said, it is unrewarding being Market Monetarist, and it looks like it is going to get worse. But more importantly than that, it looks to get worse for those who make a living in the real economies of the world.

8 thoughts on “GOP Wins; Bad Monetary Policy Will Get Worse?

  1. From @conorsen on Twitter: “Seeing several people also point out that the large GOP House majority allows Boehner to ignore tea party back benchers.” Perhaps I’m being overly optimistic, but just maybe this will work in Yellen’s (and the economy’s) favour.

  2. The contrast between Texas and Arkansas right now is noteworthy: with Arkansas voting in a minimum wage hike, and Texas – with more resource capacity – determined to keep as tight a lid on services formation, as possible.

  3. It’s interesting to think that in a two party world where the Executive or Congress had complete control of the Central Bank, the soundness of each party’s monetary views would be the dominant influence of each party’s long-run success. Even if Party A had perfect supply side policies, was infinitely wise in foreign affairs, and kept its nose clean, if they consistently made monetary boners they’d lose. Especially since other sorts of policies take time to pay out.

  4. It is hard to think of any defunct economist at all who was fixated on inflation. Neither respectable Hayek and not so respectable Mises were so fixated. But intelligent people hold all sorts of silly ideas, like theism in all its infinite and contradictory varieties.

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