Tuesday, August 16, 2011

Rick Perry on Monetary Policy

There are many things I like about Governor Rick Perry, but his remarks on monetary policy make me what to cringe.  He had this to say in Iowa about Ben Bernanke and the possibility of QE3:
“If this guy prints more money between now and the election, I don’t know what y’all would do to him in Iowa, but we would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost … treasonous in my opinion.”
Governor Perry may have scored some points in the primary race with this comment, but the implication of the Fed doing nothing--a passive tightening of monetary policy--or even actively tightening would be very unpleasant for him.  Not only does tightening make it likely the U.S. economy will continue to weaken, it also makes it much harder to balance the federal budget.  As I have noted before, successful fiscal consolidation requires monetary easing. Doing so raises aggregate demand which, in turn, raises tax revenues and decreases cyclically-driven government spending (e.g. unemployment insurance).  Studies show (e.g. here, here, and here) that when fiscal austerity was associated an economic recovery it occurred because monetary policy was easing.  Tightening, on the other hand, would only further increase the cyclical budget deficit.  

Along these lines, a key lesson from the recent crisis and the Great Depression that Governor Perry should take to heart is that tight monetary policy opens the door for more active fiscal policy.  Imagine if the Fed had  stabilized nominal spending more effectively and thus prevented the economic collapse in late 2008, early 2009. It would have been a lot harder to justify the large fiscal stimulus package. The same is true for 1929-1933.  Had the Fed not been passively tightening monetary policy at that time there would have been far less political support for fiscal policy and government intervention in the economy.

I hope Governor Perry is listening. 

7 comments:

  1. There are many things I like about Governor Rick Perry,

    Really? Why?

    Texas on the Brink.

    JzB

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  2. How about this: http://www.statesman.com/news/local/wily-coyote-no-match-for-governors-gun-634362.html

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  3. But printing more money after the election--and the GOP is installed in the White House--would be okay.

    Ai-yi-yi.

    Is there another party I can vote for?

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  4. "Many things I like about Perry"

    I don't know, he seems to this observer to ooze insincerity and to have little core personal views (beyond fundamental religion)and mostly seems determined to live up to the rest-of-the-nations's view of what a typical Texas crony capitalist business type is like.

    I'll take a principled libertarian like Ron Paul over another schmoozing creepy crony capitalist any day.

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  5. Jazzbumpa and ECB,

    That was an uninformed statement on my part. After reading up on him more I should have said "some things" I like about Rick Perry.

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  6. Have you read Stephen Williamson's blog post on Perry and Texas Higher Ed? As one directly affected, Do you have any thoughts on that?

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  7. Not strictly relevant I suppose, except that Perry is a graduate, but a news station doing a piece on him showed a clip of some A&M students marching in uniform, and for a second I really did think I was watching a clip of Hitler Youth movement from the 1930s.
    Unsettling.

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