Tuesday, October 11, 2011

Populism, Perry, Monetary Policy

There's been very little direct debate about monetary policy in American political culture, but the undercurrents of it are everywhere. Most prominently, Texas Gov. Rick Perry suggested that it would be treasonous for Federal Reserve Bank Chairman Ben Bernanke to start a new round of quantitative easing before the election.

Yet there's one interesting counterpoint that as far as I know has drawn no comment at all from the blogosphere. During the Bryan era at the beginning of the 20th century, the populist faction of American politics favored soft money. Now, they favor hard money. Politically speaking, this tends to be associated with the Tea Party faction of conservative Republicans, but it's important to note that in the country at large this plays out mostly as a populist vs. elite issue, as Tyler Cowen and others have pointed out.

Back to Perry again. He has been roundly criticized (fairly, I think) for the reckless and inflammatory nature of his accusations against Mr. Bernanke. But as I think about it, it's worse than that. As the saying goes, it's worse than a crime, it's a mistake. The verdict on the performance of the Fed under this crisis will end up in macro textbooks some generations from now. We don't have to withhold our judgment till then. However, we should also get clear on what we should expect Mr. Bernanke and the Fed to accomplish. The subtext of Perry's accusations is that the us honest Americans are doing what we're supposed to, but the Washington elites are screwing everything up. But in this particular case at least, it's a bad rap: government spending and regulatory mismanagement, under the leadership of both parties and supported by the voters, has overburdened the economy and has left the monetary authorities without any good options.

This is especially topical today in light of the news that Thomas Sargent (and Christopher Sims) have won the most recent Nobel Prize for economics. As Professor Cowen summarizes,
One of his most important (and depressing) papers is Sargent, Thomas J. and Neil Wallace (1981). “Some Unpleasant Monetarist Arithmetic“. Federal Reserve Bank of Minneapolis Quarterly Review 5 (3): 1–17. The main idea of this paper is that good monetary policy requires good fiscal policy. Otherwise the fight against inflation will not be credible. This is probably his most important paper.

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