Wednesday, December 1, 2010

Why Conservatives Should Support QE2

I make the case over at the National Review that conservatives should support QE2.  The punchline is that tight monetary policy almost always leads to more government spending and intervention.  The best examples of this are the early 1930s and late 2000s.  In both cases effectively tight monetary policy turned what could have  been ordinary recessions into great ones.  These great recessions, in turn, opened the door for more government involvement in the economy. From this perspective, QE2 is nothing more than a long overdue attempt by the Fed to set monetary policy right and thereby reduce the likelihood of further government intervention in the economy. 

For another perspective on why conservatives should support QE2 see Scott Sumner's Open Letter to Conservatives


  1. Good commentary on NRO. Why a price level target rather than nominal spending target?

    Also, I think that expecations of increased spending (and higher sales) in the future will motivate increased spending how. Whether that involves higher prices or higher production is not important--or rather, current spending and nominal interest rate rise either way.

  2. Bill:

    You know I prefer a nominal spending target, but decided to stick something with which the average reader would be more familiar. Yes, expectations of spending are important too and I tried to convey that idea in the part where I talk about expectations spurring on the virtuous recovery.

  3. David,

    I kind of went to town in the comments section of your column, and occasionally presumed to speak on your behalf. I apologise and hope to have not misrepresented your views in any way.

    There are many juicy examples of common macroeconomic fallacies in the comments. I just couldn't resist answering with a few of my own.

  4. I suspect many right wing critics of QE2 lack a basic understanding of algebra. This makes it difficult for them to understand the monetary equation of exchange.

  5. Lee,

    Thanks for your contribution. Your comments were great. I wish those commentators would sit down and read some of Leland Yeager's work on monetary disequilibrium. It would go a long ways in correcting some of these macro fallacies.

  6. Richard A,

    Sometime ago you had a great graph that showed NGDP, RGDP, and the Delfator. If I recall, it made a convincing case for a NGDP target. Is that right? If so, can you repost it again? Thanks.

  7. David,

    I wish I could read some of Leland Yeager's work on monetary disquilibrium. Almost everything he wrote on the matter seems to be either inaccessible or prohibitively expensive.

  8. GDPn = P x GDPr

    From FRED, here is a graph of nominal and real GDP along with the GDP price deflator.

    As can be seen, in the short run GDPr changes with GDPn but the price deflator is slow to change. Targeting P would tend to make GDPr less stable than targeting GDPn. The above graph I hope shows why targeting GDPn is superior to targeting P.