An open letter to George Will on the Federal Reserve and monetary policy
I don’t believe we’ve ever met, though for several years our paths frequently crossed in Georgetown as we both walked to lunch. Of course I’m a long–time reader of your newspaper columns, gaining valuable insight from and agreeing with the vast, vast majority. Your writings on the Federal Reserve and monetary policy, however, land in that misguided minority. Take your most recent piece on the nomination process for new Fed chairman and the central bank’s continued bond buying program — a failed effort, in your view. The final paragraph provides a good summary:
The Fed has become the model of applied progressivism, under which power flows to clever regulators who operate independent of political control. The Fed is, however, a creation of Congress, which may not forever refrain from putting a bridle and snaffle on a Fed that increasingly allocates credit, wealth and opportunity.
A few friendly observations:
1. That “bridle and snaffle” you wish Congress to apply would be, I assume, a single mandate focused solely on price stability to replace the current dual mandate that demands the Fed also pursue maximum employment. In other words, you wish the Fed was more like the European Central Bank. But the ECB’s policy has been a disaster in recent years. Unlike the Bernanke Fed, it has failed to offset the eurozone’s fiscal austerity with monetary easing. The US economy has been slowly growing since summer 2009 and adding jobs despite the most intense fiscal consolidation since the Korean War demobilization. The eurozone, on the other hand, is only now emerging from a double-dip recession as unemployment remains at the worst levels since the start of the 2007 global recession.
2. The Fed isn’t allocating “credit, wealth, and opportunity,” it’s merely trying to accommodate 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. When a central bank fails to do this essential job of meeting money demand, as happened in 2008 globally, you get depressions or at least great recessions. If the Fed was creating a “sugar high,” inflation would be surging rather than quiescent. And equating low interest rates with easy money is a mistake. As Milton Friedman put it: “After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead.”
3. Speaking of Uncle Miltie, you seem completely unaware of the market monetarist school which has updated Friedman’s monetarist approach to monetary policy. Market monetarists — and they exist on the left and right — advocate the Fed target the path of nominal GDP and make up for any misses. While the Fed cannot much affect the US economy’s potential growth rate, it can offset severe demand shocks and stabilize total spending in the economy with this rule-based approach to monetary policy. Economist Scott Sumner offers an excellent summary in this National Affairs essay, “Re-Targeting the Fed.” I would also recommend ringing up Richmond Fed economist Robert Hetzel. As Hetzel persuasively argues in The Great Recession: Market Failure or Policy Failure, it was the Fed’s tight monetary policy miscues after the 2008 downturn began that turned a run-of-the-mill recession into a once-in-a century disaster.
4. I guess my basic point is that the center-right approach to effective, rules-based monetary policy isn’t just limited to the supposedly prewar Austrian (gold standard, business cycle) critique that you lay out in the column. (Friedman once said: “I think the Austrian business-cycle theory has done the world a great deal of harm.”)
As I wrote recently in National Review: “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.”