Over the last month, with astonishing rapidity, opposition to looser monetary policy has become the default position of the Right. Sarah Palin, Paul Ryan, and Mike Pence have all condemned QE2. Conservative worthies have written an open letter to Ben Bernanke urging him to cease and desist. Conservative pundits who have never previously expressed any interest in monetary policy are now alarmed by the prospect of (as some of them put it) “hyperinflation.”
Maybe Bernanke’s critics are right. Certainly there are a lot of smart monetary economists who agree that QE2 is a bad idea, and the skeptics include many of the people on whom I usually rely to form judgments about economic policy. But I find the economists on the other side of the argument–I’ve started reading these three economists daily–more persuasive.
I suspect that intellectual inertia is affecting conservatives’ assessment of this issue as much as the merits. As in so many other areas of policy thinking, conservatives are still reacting to the experience of the late 1960s through the early 1980s–when monetary restraint was exactly what the economy needed. The last decade, in which excessively loose policy at least abetted a ruinous bubble, has reinforced the conservative preference for tight money. But that preference is not applicable at all times and in all circumstances, and it is no longer 1979.
Yet conservatives are talking about runaway inflation at a time when the consumer price index, which itself is generally considered to overestimate inflation, has been registering 1-2 percent inflation. The spread between inflation-indexed and unindexed bonds has also yielded a market prediction of inflation in that range. Opponents of QE2 say that the Fed should not be deliberately raising expectations of future inflation. Maybe they’re right. But let’s have some perspective. If the Fed delivers on the 2 percent average inflation it seems to want, we’ll still be below the average inflation rates of each of the last five decades.
And let’s remember as well that both Milton Friedman and Friedrich Hayek would probably have favored something like QE2.