The Agenda

The QE2 Letter

As you may have read in the Wall Street Journal, a number of economists, investors, and political strategists, including some of my Economics 21 colleagues, have published an open letter expressing profound concern over the Federal Reserve’s $600 billion bond purchase. Real Time Economics has the full text.

I’m certainly not an expert on monetary policy, and I’ve been grateful to read the arguments of Scott Sumner, Arpit Gupta, and many other sharp thinkers who endorse quantitative easing. One thing I’ve come to understand is that quantitative easing is not a partisan issue.

Though the letter in question was signed primarily by people who can fairly be identified as right-of-center, there are many conservatives and libertarians who can be found on the other side of the issue. There are left-of-center economists, including Joseph Stiglitz, who strongly favor more aggressive fiscal policy and have questioned the efficacy of QE. And there is at least one prominent left-of-center journalist who is about as concerned about the risks of QE as the signatories — I’m referring to our friend Felix Salmon, who recently wrote the following:


In theory, QE can help jump-start U.S. economic growth, which in turn will help the rest of the global economy. But when no one in the rest of the world seems the slightest bit grateful for the Fed’s help on this front, something is clearly amiss.

The Fed’s job is not to try to replicate a fiscal stimulus by monetary means, and global policymakers don’t believe that the Fed is truly independent of the U.S. government. (I don’t believe that either.) QE is an experiment, and like all experiments it can go wrong. At the very least, the Fed should have some clear criteria by which they can determine whether it is working or not, and should commit to unwinding the program should the latter be the case.

This sounds very sane to me. Like Felix, I’m particularly troubled by the international reaction:

It seems clear that the G20 meeting in Seoul achieved absolutely nothing largely because of the unfortunate timing of Bernanke’s QE2 announcement. It overshadowed everything else, it put Obama on the defensive, and it made it impossible for the G20 to agree on anything. I don’t think that the FOMC anticipated the volume of the international criticism of U.S. policy, and that alone is reason to reconsider what they’re doing. After all, if a policy designed to increase confidence only serves to increase mistrust, it probably isn’t working.

Felix could be wrong to be so troubled by QE. But I don’t get the impression that he has been blinded by anti-government ideology. In Paul Krugman’s view, opposition to QE rests on precisely that:


But it’s not really a mystery what’s going on here. In part, the GOP letter-signers are against doing anything that might help Obama, of course.

Let me spell this out, as I understand it: Krugman is suggesting that the “GOP letter-signers” would oppose sharp reductions in unemployment and robust economic growth over the next two years. Even if they were quite certain that QE would alleviate our economic woes without any harmful side effects, they would oppose it in order to undermine the president’s political prospects. I hope I’m not mischaracterizing Krugman’s remarks.

But more fundamentally — and this is a point I think conservatives who believe they can remain reasonable about macro fail to grasp — this is about philosophy of government. If your bedrock faith is that government is always the problem, never the solution, then you’re not, ultimately, going to be willing to draw a line around the central bank and say that it’s OK for that semi-autonomous part of the government to engage in active problem-solving.

One could also believe that the U.S. Federal Reserve should not have a dual mandate, but rather should model itself on the European Central Bank. It could be that the European Central Bank is led by anti-government zealots, and only anti-government zealotry counsels against the kind of active problem-solving that Krugman has in mind. I’m not confident that this is true.

And what Taylor, Holtz-Eakin and others are saying, in effect, is that at this point their loyalty to that political cause trumps their professional economics; they may write textbooks and analytical papers in which active monetary policy makes sense, but when push comes to shove they will lend their credibility to the extreme anti-government-no-matter-what camp.

This last paragraph is particularly interesting given Paul Krugman’s increasingly complicated relationship with the wider economics profession. I recommend reading John Cochrane’s excellent short essay on the discourse surrounding fiscal stimulus.


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