Monetarism and Conservatism

by Ramesh Ponnuru

Paul Krugman writes that “monetarism—broadly defined as the view that monetary policy can and should be used to stabilize economies—has more or less disappeared from the scene, both intellectually and politically,” because it requires a degree of government activism with which the Right is uncomfortable.

If monetarism is defined that broadly, I don’t think that conservatives have turned against it. Krugman links to an interview in which Rep. Kevin Brady, the chairman of the House Ways and Means Committee, says that the Federal Reserve should have a statutory mandate focusing it on price stability alone. I assume that Brady favors it because he believes that focusing on price stability alone is the biggest contribution the Fed can make to economic stabilization. That is, he thinks that the economy will be more stable if the Fed adopts a rule of keeping prices on a predictable path of increasing, say, 1 percent a year on average than if it adopts a different rule or continues to follow no rule. (I say “on average” because Brady has told me that he believes that if the Fed misses its target in one period it should correct for it in the next to keep the average where it should be.)

I would have the Fed follow a slightly different rule, one that would keep nominal spending on a stable and predictable path. That rule would allow prices to move in response to productivity trends, while a price-stability rule would force the Fed to make productivity-driven booms and busts bigger. (If increased productivity put downward pressure on prices, for example, a price-stabilizing Fed would have to inflate to counteract that pressure instead of letting prices fall below the target.)

If the Fed had to follow either rule, it would have considerably less discretionary authority than it has exercised throughout its history. In that important sense, we’d have less monetary activism, not more. As between the two rules, it’s not clear to me why we should think that one is more or less activist, more or less interventionist, than the other; and it’s not clear why we should think either is more or less activist or interventionist than any other proposed rule.

So I don’t think there’s any need to choose between monetarism and a high degree of skepticism about government intervention. To reconcile the two views, the government skeptic need believe only that as long as government is in the central-banking business the central bank should adopt a policy that does the least to generate or exacerbate business cycles. Some conservatives may see a contradiction here, but if so they are merely replicating Krugman’s error. 

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