Thursday, December 13, 2012

Monetary policy politics

Some subjects are very important and also too complicated, technical and boring to get the public attention and comprehension they deserve. Monetary policy generally falls into that category. Basically, what's happening currently is the Fed has decided to keep it loose--to expand the money supply, or loosely speaking "print money"--until unemployment falls below 6.5%. In so doing, the Fed is following a "rule"; in other words, it is making a specific statement as to what it intends to do, as opposed to using vagueness to maintain some flexibility as to how it will act in the future.

This combination of loose monetary policy and an explicit rule puts the Fed at odds with one longtime strand of conservative thinking about monetary policy, and in alignment with another strand of conservative thinking. Many conservatives have had an affinity for tight monetary policy, dating back to the Volcker clampdown on inflation in the early 1980s. Many conservatives also have had an affinity for rules over discretion--for limiting in some way the central bank's flexibility on how to set policy.

Those two tendencies often have fit hand in glove, in a purist form with conservative advocacy of a gold standard--an arrangement that would tighten monetary policy (greatly) and get rid of policymakers' discretion (indeed, get rid of the central bank altogether, many gold standard advocates prefer).

There are some problems, though, with gold standards or lesser forms of tight money/less discretion policy. One is that tight money can be destructive in a slow-growth economy. Another is that it's very hard to ensure policymakers actually do limit their discretion (they could always revise a rule or, as has been done historically, abandon a gold standard).

By adopting a loose-money, but rule-based, approach, the Fed can be expected to continue getting resistance from tight-money conservatives--but to get some support from conservatives attracted to the rule aspect. (See, as an example, "Two cheers for the Bernanke rule," by James Pethokoukis.)

That could shake up the politics of monetary policy somewhat, in that castigating the Fed for "inflating the currency" has been pretty much de rigeur on the right in recent years (agreed on by most if not all of the GOP presidential candidates last time around, including Romney); possibly we'll now see some emphasis on the rule aspect, and less castigation of the Fed going forward. Of course, that assumes the Fed sticks with its rule. In any case, here's hoping (a) that the policy is effective in helping the economy, and (b) that the GOP will move back somewhat to its onetime role of defender of the Fed against populist sentiments.

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