It’s not too hard to understand why everyone seeking the Republican presidential nomination is proposing huge tax cuts for the rich. Just follow the money: Candidates in the GOP primary draw the bulk of their financial support from a few dozen extremely wealthy families. Furthermore, decades of indoctrination have made an essentially religious faith in the virtues of high-end tax cuts – a faith impervious to evidence – a central part of Republican identity.
But what we saw in Tuesday’s presidential debate was something relatively new on the policy front: an increasingly unified Republican demand for hard-money policies, even in a depressed economy. Ted Cruz demands a return to the gold standard. Jeb Bush says he isn’t sure about that, but is open to the idea. Marco Rubio wants the Fed to focus solely on price stability, and stop worrying about unemployment. Donald Trump and Ben Carson see a pro-Obama conspiracy behind the Federal Reserve’s low-interest rate policy.
And let’s not forget that Paul Ryan, the new speaker of the House, has spent years berating the Fed for policies that, he insisted, would “debase” the dollar and lead to high inflation. Oh, and he has flirted with Carson/Trump-style conspiracy theories, too, suggesting that the Fed’s efforts since the financial crisis were not about trying to boost the economy but instead aimed at “bailing out fiscal policy,” that is, letting President Barack Obama get away with deficit spending.
As I said, this hard-money orthodoxy is relatively new. Republicans used to base their monetary recommendations on the ideas of Milton Friedman, who opposed Keynesian policies to fight depressions, but only because he thought easy money could do the job better, and who called on Japan to adopt the same strategy of “quantitative easing” that today’s Republicans denounce.
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George W. Bush’s economists praised the “aggressive monetary policy” that, they declared, had helped the economy recover from the 2001 recession. And Bush appointed Ben Bernanke, who used to consider himself a Republican, to lead the Fed.
But now it’s hard money all the way. Republicans have turned their back on Friedman, whether they know it or not, and draw their monetary doctrine from “Austrian” economists like Friedrich Hayek – whose ideas Friedman described as an “atrophied and rigid caricature” – when they aren’t turning directly to Ayn Rand.
This turn wasn’t driven by experience. The new Republican monetary orthodoxy has already failed the reality test with flying colors: that “debased” dollar has risen 30 percent against other major currencies since 2011, while inflation has stayed low. In fact, the failure of conservative monetary predictions has been so abject that news reports, always looking for “balance,” tend to whitewash the record by pretending that Republican Fed critics didn’t say what they said. But years of predictive failure haven’t stopped the orthodoxy from tightening its grip on the party. What’s going on?
My main answer would be that the Friedman compromise – trash-talking government activism in general, but asserting that monetary policy is different – has proved politically unsustainable. You can’t, in the long run, keep telling your base that government bureaucrats are invariably incompetent, evil or both, then say that the Fed – which is, when all is said and done, basically a government agency run by bureaucrats – should be left free to print money as it sees fit.
Politicians who lump it all together, who warn darkly that the Fed is inflating away your hard-earned wealth and enabling giveaways to Those People, are always going to have the advantage in intraparty struggles.
You might think that the overwhelming empirical evidence against the hard-money view would count for something. But you’d only think that if you were paying no attention to any other policy debate.
Leading political figures insist that climate change is a gigantic hoax perpetrated by a vast international scientific conspiracy. Do you really think that their party will be persuaded to change its economic views by inconvenient macroeconomic data?
The interesting question is what will happen to monetary policy if a Republican wins next year’s election. As best as I can tell, most economists believe that it’s all talk, that once in the White House someone like Rubio or even Cruz would return to Bush-style monetary pragmatism. Financial markets seem to believe the same. At any rate, there’s no sign in current asset prices that investors see a significant chance of the catastrophe that would follow a return to gold.
But I wouldn’t be so sure. True, a new president who looked at the evidence and listened to the experts wouldn’t go down that path. But evidence and expertise have a well-known liberal bias.