Politics & Policy

Right on Quantitative Easing

The rising stock market shows that the Fed’s easy-money policies are working.

Laura Ingraham was understandably baffled. She assumed that someone from the American Enterprise Institute and National Review who came on her mega-popular radio program to talk about the Federal Reserve would surely bash its decision to keep buying Treasury bonds and mortgaged-backed securities. Consensus — maybe near unanimous? — opinion on the right judges the Fed’s “quantitative easing” to be at best a benignly useless effort and at worst a temporary fillip that risks creating dangerous bubbles and inflation. It’s the Bernanke Band-Aid over the awful Obama economy.

Instead, her guest — whose names rhymes with “Sethokoukis” — approved of the Fed’s surprise move. Low inflation and high unemployment, he explained, meant that now was a poor time to tighten monetary policy. He added that stocks rallied on news of the Fed decision because investors knew tapering would further slow an already anemic economic recovery.

Ingraham was having none of it. “What about the argument that the run-up in the market is not tied to American GDP at all?” she asked. “Essentially this is a false high, a temporary high, a sugar high. . . . You’re one of the few people I have heard talk about this as a healthy recovery. . . . The middle class has less hope in its future. . . . You have to wonder if the pain that is ultimately going to happen is being delayed by this manipulation of where we really are.”

Other right-of-center talk-radio hosts offered their versions of Ingraham’s exasperated response, though they perhaps presented their thoughts less vigorously, as their AEI-NR guest made the case that QE, though hardly optimal policy, was doing some good and was worth continuing.

Here’s what explains the disconnect: Some economists believe the slow-growth, jobless recovery is partly a sign that the economy’s growth potential has fallen since the late 1990s. Demographics, education, regulation, taxation, technology, and globalization are among the possible structural reasons. All that stuff, however, should be filed under “Not the Fed’s Business.”

Still, the economy could be performing a lot better. What a central bank can do is boost spending and investment to reach a country’s economic potential, whatever that it is. If the Fed was injecting too much money into the economy relative to the amount of money demanded — creating that unsustainable sugar high — “it would be leading to high inflation, but it isn’t,” says Bentley University economist Scott Sumner. Currently both government and private-sector measures show that inflation is quiescent.

But there continues to be excess demand for liquid assets, bonds, and cash in the aftermath of a series of economic shocks: the recession, financial meltdown, and euro-zone crisis. One bit of evidence for this, notes Western Kentucky University economist David Beckworth, “is that households still hold a relatively large share of their assets in liquid form.” The Fed is partially accommodating this demand. When a central bank really fails to do its job meeting money demand, you get a Great Depression or Great Recession.

Have the Fed’s easy-money policies worked? The rising stock market is a sign they have, since one way the Fed is trying to boost the economy is by nudging people into higher-returning assets. Granted, the Fed’s QEs and forward guidance have yet to deliver strong or accelerating growth and are inferior to a policy that targets the level of total spending, or nominal GDP, in the economy. But they have probably prevented both a double-dip recession and a continuation of double-digit unemployment of the sort seen in the euro zone, where the central bank has been far less active than the Bernanke Fed.

Now this analysis has gotten little currency in much of the conservative-libertarian community — which is maddening because it merely updates the basic Econ 101 monetary insights that helped Milton Friedman earn a Nobel prize. (There is lots of evidence, by the way, that Uncle Miltie would be a fan of what Helicopter Ben has been doing lately.)

The new hotness on the right is a flavor of pre-war Austrian economics that views markets as unstable, bubble-prone entities and throws up its hands when they pop. Advocates are particularly scornful of Fed “central planning,” and pine for a 19th-century Golden Age of the Market when U.S. government–created currency was linked to a government-specified commodity at a government-determined ratio. But, as University of Mississippi economist Josh Hendrickson points out: “To argue that the Fed shouldn’t conduct QE because centrally planning is hard is an argument against a central bank; it is not an argument against QE.” The Austrian economist Friedrich Hayek himself said that if he were a central banker dealing with economic collapse, he would “try everything in [his] power” to prevent it.

My pals Laura, Mark, Sean, Rush, and other top radio talkers should broaden the debate and tap into the 2013 version of Friedmanomics by booking “market monetarist” economists such as Beckworth, Hendrickson, and Sumner, as well as Harvard’s Greg Mankiw and journalists like NR’s own Ramesh Ponnuru.

This is a critical period for economic thinking on the right. It’s reminiscent of the late 1970s when conservatives accepted economic reality and abandoned root-canal fiscal policy — recall that Barry Goldwater voted against JFK’s supply-side tax cuts — for Reagan’s pro-growth economics. Now it’s time to reject a resurgence of root-canal monetary policy, too.

— James Pethokoukis, a columnist, blogs for the American Enterprise Institute.


The Latest