Conservatives For the Federal Reserve

Posted: Mar 24, 2013 5:43 PM
When Barack Obama came into office in 2009, a funny thing happened: Republicans and Democrats made a near-identical flip on how they felt about Federal Reserve Chairman Ben Bernanke. In early 2008, Bernanke enjoyed a 61% confidence rating among Republicans. That fell to 36% by early 2009. Conversely, his confidence among Democrats during that time period rose by 24 points, to 64%.

Distrust of the Federal Reserve has continued to grow among conservatives during this time period. Former Rep. Ron Paul (Tex.) often spoke about the Federal Reserve's harmful policies, but it was only during Obama's time in office that he found much traction. The Federal Reserve Transparency Act of 2012 was passed last July by the House of Representatives by a vote of 327-98. A Senate companion bill, however, is stuck in committee and likely won't see the light of day in the Democrat-controlled Senate.

Not all conservatives are so aggressively anti-Fed, however. An emerging cadre of conservative journalists and economists have been pushing back with an "update" of Milton Friedman's monetarist theory that maintains an active an effective role for the Federal Reserve. At the American Enterprise Institute on Friday, Jim Pethokoukis moderated a panel on "market monetarism," a branch of economic theory that would show a mixed record during Bernanke's tenure but strong support for such controversial measures like quantitative easing.

Pethokoukis opened with a quote of Oliver Cromwell that summed up the market monetarist movement against both the Keynesian consensus and those who have already thought Bernanke past salvation: "I beseech you, in the bowels of Christ, think it possible that you may be mistaken."

Other panelists included David Beckworth, an economist at Western Kentucky who has written frequently on the topic for National Review; Scott Sumner, an economist at Bentley University whose writing on monetarism helped him emerge as one of the fiercest critics of President Obama's stimulus and strong advocate for a different economic response to the 2008 housing crisis; and Ryan Avent, economics correspondent for The Economist.

"Market monetarism is an update of the monetary policies of Milton Friedman," Pethokoukis said, claiming the theory as descended from possibly the greatest conservative economist of the last century. The market monetarist theory is that it was Federal Reserve inaction that created our prolonged economic slump. "Monetary policy in 2008 turned a mild downturn into a Great Recession," Pethokoukis said.

The consensus criticism among the panelists is that the Federal Reserve's dual mandate of both maintaining price stability and pushing policies that would lead to full employment has resulted in a confused and inconsistent Fed philosophy. There's actually large support for this among conservative Republican legislators on Capitol Hill, though their ideal solutions differ.

Rep. Kevin Brady (R-Tex.), Chairman of the Joint Economic Committee, is the author of the "Sound Dollar Act," which would repeal the Federal Reserve's dual mandate in favor solely of price stability. The Federal Reserve's unofficial inflation target is 2%, but that must be balanced with a commitment to full employment. Inflation has been below 2% for the majority of the time since 2009 - and the Labor Department's CPI showed inflation at just 1.7% for 2012.

The AEI panel's preferred Federal Reserve policy isn't inflation targeting, however. It's nominal GDP targeting. NGDP targeting - roughly, targeting unadjusted economic growth - could synthesize both price stability and employment targets into an easier metric for the Federal Reserve.

Sumner argues that NGDP targeting would also please fans of a less-activist Fed. "It's more about setting in place a policy regime than quibbling over day-to-day decisions," he said at AEI. "If they had an explicit NGDP targeting regime, it's entirely possible they would have done a lot less than they have over the past four or five years."

Americans also fail to understand the Fed's current price stability goal, Sumner said. Most assume that the Fed's goal is merely to keep inflation as low as possible. That's incorrect: they aim roughly for a 2% target. And lately, they've been very, very far off the mark, Sumner said. "Even if the Fed didn't care at all about unemployment, monetary policy has been too contractionary under an explicit 2% inflation regime... the public has never bought in to inflation targeting. They thought the Fed was just supposed to hold inflation down, not target."

"When your policy fails, your interest rates will fall to zero and you'll have to do more."

Rep. Brady, however, is incredibly critical of the actions that the Fed has taken in an attempt to both increase employment and inflation. "Further quantitative easing by the Fed won't close America's troubling growth gap," he said this week, "nor will it lower unemployment."

On the AEI panel, Beckworth noted that inflation rates have been and continue to be too low. "I would like to see inflation rates go up. To me that would be a sign that the economy's recovering."

Beckworth's primary critique is that the Federal Reserve hasn't been aggressive enough in promoting safe assets - and that there's still a huge consumer demand for safe assets. QE2, he said, showed that Fed policy is certainly capable of assuaging this demand, but that its limited scope meant that it had limited (but measurable) effects.

Watch the entire American Enterprise Institute event here: