Rand Paul Endorses an Aggressive Fed

by Patrick Brennan

Inadvertently, one has to assume. In an interview with Bloomberg Businessweek about his presidential chances and the appeal of his economic policies, Paul was asked the following by Josh Green:

Who would your ideal Fed chairman be?
Hayek would be good, but he’s deceased.

Nondead Fed chairman.
Friedman would probably be pretty good, too, and he’s not an Austrian, but he would be better than what we have.

Dead, too.
Yeah. Let’s just go with dead, because then you probably really wouldn’t have much of a functioning Federal Reserve.

I’ll give Senator Paul the benefit of the doubt and assume he did know Milton Friedman has gone on to the big bureau of economic research in the sky, but more important, his answer here does seem to indicate he doesn’t understand Milton Friedman’s views on monetary policy at all, with the corollary that he doesn’t seem to understand monetary policy, period. Which is not necessarily, relatively speaking, a big disappointment from a first-term senator — except if he happens to hold remarkably strong views on monetary policy.

While Senator Paul is a little less explicit in his views than his father, he’s said believes the role of the Federal Reserve’s job is to “maintain the value of the dollar,” wants to consider returning to a gold standard, would like to authorize congressional oversight of Fed policy (effectively ending its political independence and its ability to formulate monetary policy as it sees fit), and almost certainly believes the Federal Reserve’s quantitative-easing program should be halted immediately. If Paul identifies with the Austrian school of economics on monetary policy (as his answer above suggests), his views are even more extreme and absolute, though so far, he’s been shier about endorsing Austrian policies than the elder Paul was.

The problem: Milton Friedman would disagree with every one of these views, and would likely have supported a much more aggressive monetary response to our economic downturn — a corpse running the Fed, in other words, would definitely not interest him like it does Paul. In fact, his views on monetary policy almost couldn’t be more different than Paul’s — he and Anna Schwartz made probably the most important 20th-century contribution to monetary-policy thinking with a 1963 book making the case that the 1929 stock market crash produced the Great Depression happened because the Fed was too passive and didn’t maintain a sufficient monetary supply (for a quick explanation of this argument, see Ramesh Ponnuru’s piece in the most recent issue of NR, which makes the case that something similar happened in 2008). So the less charitable view of Paul’s statement above is that he knows absolutely nothing about the history of monetary policy or Friedman’s thoughts on it.

The more charitable view, and probably more likely explanation (since he admits he knows Friedman didn’t hold Austrian views), is that Senator Paul misunderstands what Friedman stood for — with the effect of basically perverting the Nobel laureate’s lessons. 

Paul’s explained on a number of occasions he’d like to see a more “stable” monetary supply, a concept that Friedman endorsed, too. But they mean very different things by the phrase: Paul thinks that means literally a steady supply of money (which he thinks you could have with a gold standard, and without a Fed), when in fact, keeping the monetary supply steady actually requires huge expansions, sometimes, of the monetary base (i.e., printing money), in addition to other measures. Around the centennial of Friedman’s birth in July 2012, a number of conservative commentators made a similar mistake, arguing Friedman’s preference for a “steady monetary supply” suggests he would want the Fed today to be less active and more focused on reducing the risk of inflation — Ramesh issued a gentle corrective.

We can’t know exactly what Friedman would want in our current situation, but his intellectual legacy, as Ramesh explained in his NR piece, would lean toward a more aggressive (though probably also rule-based) Fed in 2008 and now. Even the Wall Street Journal has admitted Friedman, on balance, would probably support the Federal Reserve’s current money-printing program (QE-whatever); he actually endorsed such bond buying for Japan in the 2000s, and blamed that country’s lost decade on weak central-bank policies.

Milton Friedman would indeed be better than the man we have at the Fed right now, but almost certainly not for the reasons Paul thinks.

The Corner

The one and only.