Duncan’s Economic Blog

Monetary Policy and the Republican Party

Posted in Uncategorized by duncanseconomicblog on August 22, 2011

FT Alphaville has published a superb history of anti-bank (and specifically anti-Central Bank) populism in US politics.

It firmly roots the agenda of Rick Perry and Ron Paul in the tradition of Jefferson and Jackson and I’d highly recommend a read of it.

This is of more than historic interest – as both Erza Klein and Greg Ip have noted – the Republican turn against monetary activism may have a major economic impact.

However (and to be fair they do acknowledge this in the post) I think there is a very important difference between the latest bout of GOP Fed-bashing and the long history of anti-bank politics in the US: the radicals are attacking the Fed not sticking to ‘hard money’ policy of high rates but for being too lax.

And this is, for me at least, a bit of a conundrum. There is now a (sizeable?) constituency in US politics arguing for not only fiscal tightening but monetary tightening as well (in the UK Fraser Nelson too seems to be in this camp).

The whole argument of the ‘Expansionary Fiscal Contraction’ camp is that government spending cuts allow the central bank to keep interest rates low and this supports the recovery. Whilst I may disagree with that argument I can at least understand it.

What I can’t understand is policy makers arguing for tight monetary policy coupled with tight fiscal policy at a time of faltering global demand. That’s a recipe for depression and the fact that major political figures are now advocating it is a worry to be very concerned.

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4 Responses

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  1. Dave Holden said, on August 22, 2011 at 10:54 am

    Personally I found that muddle of an article.

    I’m guessing that where Paul (who has a long history of libertarian and basically Austrian thinking) is coming from is a view that “hard money” is more a policy for preventing our current problems not an easy fix for solving them and that in his view its the Fed’s policy of easy money no matter what that in part has led us to this point. On that last point I think he’s correct.

    The problem for him of course is that as you point out getting from here (brought to us by one sided Keynesianist and moneterist policy combined with a broken banking system) to there would be in the first instance contractionary, and seriously so. Those who vote for him are either unaware of this or so sick of the current broken and corrupt system they’re willing to suffer the consequences.

    In the case of Perry, I suspect it has more to do with his fears of the Fed stoking a fake recovering just in time for the next election rather than any real convictions.

  2. Agog said, on August 22, 2011 at 4:32 pm

    I think it’s very helpful to take a long view of these debates, and applaud the Alphaville guys for making the attempt. Clearly the ‘hard money’ types have their agenda beyond the moralistic rhetoric.

    And I also liked Cosma Shalizi’s review of Barry Eichengreen on the Gold Standard:

    “Maintaining the gold standard thus often demanded contracting the economy, to the disadvantage, the very acute disadvantage, of the vast majority of its participants. As Eichengreen emphasizes (following the great work of Karl Polanyi), one of the reasons the gold standard persisted was that that vast majority had little or no say in how their countries were run, whereas those who benefited from the gold standard — those active in international trade and investment — had considerable power. This let central banks do whatever was needful to maintain the exchange rates without fear of the economic or political consequences. (This was least true in the United States, which was also the major country least attached to the gold standard, and where indeed the Populist movement of the 1890s nearly succeeded in jettisoning it.) In the long run, what killed the gold standard was the rise of European labor movements, which forced the various political elites to share power with broadly elected parliaments. This presently led to influential political parties representing labor and agrarian interests, which didn’t care for contraction, deflation, and high interest rates. Eichengreen refers to this as the “politicization” of monetary policy, but I think it would be fairer to say that that policy had always been political, and now which set of interests it was to serve was being disputed.”

  3. Keith said, on August 23, 2011 at 11:07 pm

    I think it is important to avoid confusing the real populism of the American worker / farmer movement of the 1880s ans 1890s with the fake stooges of the rich American elite. Whose only political aim is to keep uninterruptedly low rates of Income Tax. And who are willing to contrive any set of arguments good or bad to keep their excessive share of GDP.

  4. jomiku said, on August 24, 2011 at 1:21 am

    It’s much more complicated. Take Perry. He’s a states’ righter, the kind who’d claim the Union was transgressing against the Constitution by trampling on the Constitutional rights of Southern states. That meant the right to own human beings as property but never mind; a modern states’ righter ignores that. Perry goes further than all but a few. I looked at his book after M.Yglesias went through it because I had trouble believing the quotes reflected the reality but it does: he thinks there should be next to no federal government. It’s not anti-bank but anti-US, pro-Confederacy instead of a Constitutional union. Perry even said states could do what they want on gay marriage – until the zealots in the GOP made him change his tune.

    As for Bachmann, the odds she understands monetary policy are nil. She’s a populist, which is odd given that Bryan was a populist. Now it means something different and something similar: she’s a religious zealot who wants to impose her conception of what God wants on the US. That means the moral definitions of her beliefs – which of course she sees as God-given and ours as not. (Funny how believers believe they can know the mind of God, which is of course the single biggest sin because no one can know the mind of God.) She uses anti-bank rhetoric because it serves her larger purpose. If that sounds cynical, it’s because she is a zealot who believe the ends justify the means. Those are dangerous people.

    Ron Paul is a gold nut. There’s not much else to say. It’s not so much anti-bank as anti-fiat money. His rationale is a weird mix – typical of American libertarians – of fundamentalist religion and philosophy. American libertarians want to impose their moral code while accenting the liberties they define as important, meaning usually the ones that benefit themselves. In other words, they want to oppress you and stop you from oppressing them. The religious side in part means they believe their philosophy reflects God’s plan for the natural order. On this, they sometimes draw close to the Austrians and their fixation on “natural law”, meaning a particular Christian interpretation of what is God’s plan (that wholly depends on accepting their premises as God-given). Paul and Bachman tend to the “God’s will” camp of economic management, meaning none. Perry as governor tends to activism, raising debt by a ton to build infrastructure (and paying off political donors and allies with state money). Perry is a state’s righter, meaning he would locate the power in state capitols and make the USA just a term or a chant raised at the Olympics (until Texas sends its own team).


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