Tuesday, November 16, 2010

Calling the QE2 Wing of the Republican Party

Calling the Greg Mankiws and Ken Rogoffs of the Republican party: when will you get your own "open letter to Ben Bernanke" out?  Are the other guys really the true representation of Republican economists?  I hope not, but one cannot ignore the growing criticism of QE2 coming from conservative commentators.  Ramesh Ponnuru of the National Review considers why this is happening:
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.”

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.


  1. I'm of the opinion that if the FOMC had come out with an explicit target-- price level targeting, NGDP level targeting, whatever, then John Taylor and a few others wouldn't have signed that letter. To use the Sumner analogy, the captain of the ship still hasn't clearly declared the destination. That's what Taylor is looking for-- a clear policy rule. In the absence of that, they're questioning the policy.

  2. JDTapp,

    If you are right then it seems a little reckless for him to sign the letter. The letter only adds fuel to the populist rhetoric that may one day undermined the ability of the Fed to adopt a rule based approach to monetary policy.