(Scott Olson/GETTY IMAGES)

If you guessed "purchasing long-term Treasury debt in order to push interest rates down," you got it. While campaigning in Iowa, Texas Governor Rick Perry gave his take on Ben Bernanke and the potential for a third round of quantitative easing. "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 treacherous, or treasonous, in my opinion."

If you ignore the implied threat of violence against the head of America's central bank, Perry's position is unremarkable in today's Republican Party. But that is perhaps what is so remarkable about it. The GOP's turn against monetary policy is one of the most consequential and underdiscussed trends in economic policy.

It was the conservative icon Milton Friedman, after all, who pioneered the argument that the Great Depression was largely the fault of poor monetary policy. His analysis had the dual advantages of being both true and useful to skeptics of government spending. It implied that there were more ways to prevent and respond to recessions than to simply have Congress take out the credit card.

But as Ramesh Ponnuru writes today in Bloomberg View, since the start of the financial crisis, Friedman's lessons have been forgotten, and even rejected, by many Republicans, in part because it's easy to look at the Federal Reserve's policy and misunderstand it. "We don’t have loose money, and we haven’t during our entire economic slump," argues Ponnuru. "A big reason that slump has been so deep and long is that the Fed is keeping money tight: It’s not letting the money supply increase enough to keep current-dollar spending growing at its historical rate."

The typical answer to this is to point to how the money supply has expanded, or how commodity prices -- one signal of inflation -- rose earlier in the year (they are falling now). But looking at the money supply on its own tells you rather little. You need to look at it in relation to the economy. As for commodity prices, as Ponnuru says, is anyone really willing to contend that "we have loose money any time Asian consumption of precious metals increases, or there’s a disruption of the oil market"?

The danger here isn't an opportunistic, partisan turn against sound monetary policy. That's a problem, but it's also a near inevitability in a two-party system like ours, and given the Federal Reserve's independence, it's one that can be mostly ignored. The danger here is a real turn against sound monetary policy that smart Republicans find they can't quietly abandon when they enter office. That's a world in which a Republican administration will find itself unable to make good nominations to the Federal Reserve, and perhaps even unable to stop Congress from making unwise alterations to the mandate and powers of the Federal Reserve. That's a world in which the lessons of the Great Depression -- and of Milton Friedman -- aren't just forgotten, but are in fact lost.

Five in the morning

1) Republicans are resisting Obama's payroll tax cut proposal, report Russell Berman and Bernie Becker: "President Obama’s call for an extension of a payroll tax cut could upend the political dynamics in Congress heading into the fall, as Democrats adopt a trademark Republican tactic: warning against a looming tax hike. With the economic recovery stalled, the Obama administration is pushing aggressively to keep in place the payroll tax holiday that was enacted as part of the bipartisan tax deal Congress passed in December...While Republican leaders have not rejected the proposal outright, they have sought to shift attention to their broader tax platform. Kevin Smith, a spokesman for Speaker John Boehner (R-Ohio), would not comment on the payroll tax extension...The House Republican budget chief, Rep. Paul Ryan (Wis.), has dismissed the payroll tax cut as 'sugar-high economics.'"

2) Rick Perry called another round of quantitative easing "almost treasonous," report Philip Rucker: "Texas Gov. Rick Perry, making his maiden campaign swing in Iowa after jumping into the race for the Republican presidential nomination, suggested Monday night that Federal Reserve Chairman Ben Bernanke would be committing an act of treason by printing more money between now and November 2012. Responding to a question about the Federal Reserve at a campaign event in Cedar Rapids, Perry said: '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 treacherous, or treasonous, in my opinion.'"

3) Conservatives should support looser money, writes Ramesh Ponnuru: "We don’t have loose money, and we haven’t during our entire economic slump. A big reason that slump has been so deep and long is that the Fed is keeping money tight: It’s not letting the money supply increase enough to keep current-dollar spending growing at its historical rate...Conservatives are suspicious of any loosening because they think of it as a government intervention in the free market. But they are wrong. A central bank that keeps the supply of money too low is just as interventionist as one that keeps it too high. There’s a strong case against central banking itself -- against, that is, having a government agency with vast discretion over the money supply. But as long as we have one, it ought to set the best policy it can.

4) The Republican top tier is way outside the economic mainstream, writes Steve Rattner: "Gov. Rick Perry of Texas told Fortune magazine that if he had been president in 2008, he wouldn’t have engaged in the financial rescue effort. Without the bailout, initiated by the Bush administration, we would not have a functioning economy today. Mr. Perry also wants to repeal the 16th Amendment, thereby eliminating the income tax, which accounts for 80 percent of government revenue. Like his fellow aspirants, Mr. Perry has offered no analysis to explain how the government would function under his vision. Mr. Paul, who finished second in the Iowa straw poll on Saturday, has for decades sought to abolish the Federal Reserve, arguing that it is corrupt and unconstitutional. Eliminating our central bank is a crazy idea that would plunge the country back into an oscillating 19th-century world of panics and busts."

5) Obama wants to keep a major federal role in the mortgage market, reports Zachary Goldfarb: "President Obama has directed a small team of advisers to develop a proposal that would keep the government playing a major role in the nation’s mortgage market, extending a federal loan subsidy for most home buyers, according to people familiar with the matter. The decision follows the advice of his senior economic and housing advisers, who favor maintaining the government’s role as an insurer of mortgages for most borrowers. The approach could even preserve Fannie Mae and Freddie Mac, the mortgage finance giants owned by the government, although under different names and with significant new constraints, said people knowledgeable about the discussions...Many economists, including some who have worked in the White House under Obama, consider the federal role harmful to the free market."

Intergenerational cover interlude: Win Butler of Arcade Fire and Mavis Staples play "The Weight" by The Band.

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Still to come: The European Central Bank went further than expected to prevent a crisis; a Supreme Court ruling on health care reform should come by June; lobbyists are gearing up for supercommittee; a court has struck down Obama's drilling policy; and a robot that can run like a human.


The European Central Bank went further than expected to shore up Spain and Italy last week, reports Howard Schneider: "The European Central Bank made record purchases of government bonds last week, it reported Monday, going further than many analysts had expected to hold down the borrowing costs of Italy and Spain, two of the largest countries caught up in the continent’s debt crisis. The $30 billion in government debt purchased by the central bank last week eclipsed the previous $20 billion bought in the days after it agreed last year to use its financial power to help restrain interest rates paid by weakened European governments. Increasing the demand for a government’s bonds lowers the interest rate it pays. The aggressive intervention offered evidence of the ECB’s effectiveness -- Spanish and Italian borrowing costs dropped by a full percentage point after a spike -- but it also underscored the extent of the challenge facing Europe’s policymakers."

Long-term joblessness takes a mental health toll, reports Daniel Lippman: "Long-term unemployment is wreaking a psychological toll across the United States, with experts and a number of studies saying the jobless are especially at risk of depression, increased anxiety and physical ailments. The National Alliance on Mental Illness, an advocacy group, said in a March report that a cumulative $1.8 billion from mental health services was cut in 32 states and the District of Columbia from 2008 to 2010...Katherine Power, the director of the Center for Mental Health Services at the Substance Abuse and Mental Health Services Administration, an agency of the Department of Health and Human Services, said that around a third of the 62,000 monthly calls to the 143 suicide-prevention telephone call centers that her agency supports around the United States were related to economic distress."

The US could learn from Germany's work-sharing program, writes Joe Nocera: "When the German economy turned south after the 2008 financial crisis, the pain was mitigated by a program known as 'Kurzarbeit.' The word means short work. Instead of laying off workers, German companies cut back their hours. The government then used money set aside during good times to pay the workers around 60 percent of their lost wages. The labor unions went along because they believed it was better to keep people employed even at reduced pay. This is the German social compact. As we suffer through our own economic hard times, the German approach is something we can only envy. Here, companies quickly lay off workers, many of whom never find their way back into the full-time labor force. Corporations shy away from investing for the future, even though investment is what will turn the economy around."

The economists versus politicos debate in the White House is much ado about nothing, writes Ezra Klein: "The political team, led by Chief of Staff Bill Daley and campaign Svengali David Plouffe, doesn’t want President Obama wasting his time or alienating swing voters by arguing for jobs bills Congress won’t pass. Better to work on deficit reduction...The economists, led by Gene Sperling, the director of the National Economics Council...think the economy needs significant action on jobs...If the political team wins, the jobs proposals that won’t pass will be somewhat smaller, and the president will talk somewhat more about deficit reduction. If the economic team wins, the jobs proposals will be somewhat larger, and the president will speak somewhat more angrily about Republican obstruction. My heart is with the economic team here, but my head says neither strategy will register in the unemployment rate. And I have trouble caring about strategies that won’t register in the unemployment rate."

Rick Perry's tax soundbite is mistaken, writes Ruth Marcus: "'We’re dismayed at the injustice that nearly half of all Americans don’t even pay any income tax.' -- Texas Gov. Rick Perry, presidential candidacy announcement speech, Aug. 13. Really? Of all the ills in the world, of all the problems with the economy, all the difficulties with the tax code, this is the one that Rick Perry chooses to lament?...The notion that these households pay no taxes is flat-out wrong. They pay -- leaving aside state and local sales, income and property taxes -- federal gasoline and other excise taxes and, most significantly, payroll taxes on every dollar they earn. These taxes are regressive. Everyone pays the same share, regardless of income, so they hit the poor hardest, and they counterbalance the progressivity of the income tax code."

Adorable endangered species interlude: Newborn Tasmanian devils.

Health Care

We'll probably have a ruling on health care reform's constitutionality by June, reports Jennifer Haberkorn: "Friday’s federal court ruling against a key provision of the health care reform law makes it almost certain the Supreme Court will decide the law’s constitutionality in the 2012 term. If the high court decides to take up the case, it probably won’t rule until June -- ensuring that President Barack Obama’s signature law will be the center of another very public debate just five months before the election. The court has two very strong reasons to take the case now. First, there are two circuit courts that have ruled in opposite directions on the constitutionality of the law's individual mandate. And second, because the Obama administration lost in the latest ruling, it is going to be the one filing the appeal. The Supreme Court rarely turns down such requests from the federal government, especially on an issue with the scope of the health reform law."

State regulators want national health exchange plans to play by state rules, reports Sam Baker: "National insurance plans created by the healthcare reform law must be held to the same state-by-state standards as their smaller competitors, state insurance regulators warned Monday. The National Association of Insurance Commissioners (NAIC) said lax rules for national plans would create an unfair competition and deprive consumers of certain benefits. The healthcare law calls on states to establish insurance exchanges -- new, competitive markets for individuals and small businesses to buy coverage. And to ensure some level of competition in every state, the law says two nationwide plans have to be offered in every state’s exchange. Although the plans will be national, the NAIC said, they still should have to comply with each state’s laws."

Domestic Policy

Lobbyists are gearing up to pressure the supercommittee, reports Anna Palmer: "Now that the members of the supercommittee have been named, lobbyists have begun strategizing in earnest. And they’ve got their sights set beyond just the elite 12. Several lobbyists said they are focused on the committees of jurisdiction that have until Oct. 4 to send their recommendations to the debt panel as the first line of defense to keep their clients’ interests off the chopping block. Rob Collins, former chief of staff to House Majority Leader Eric Cantor (R-Va.), said he is thinking about it like a court case in which it is always better to win the case and not have to appeal...While there is still a high level of pessimism downtown that the supercommittee won’t reach a deal, lobbyists aren’t counting on the panel failing. 'Most clients are not assuming sequestration is the final route, even if they think it might be better for them,' said Jonathon Jones of Peck, Madigan, Jones & Stewart."

Rick Perry has been walking back past remarks on Social Security slightly, reports Evan McMorris-Santoro: "Texas Gov. Rick Perry (R) made a lot of hay last year with his contention that Social Security is a Ponzi scheme and his suggestion that states should be allowed to abandon it for their own senior support systems before it's too late. Less than a week after Perry announced his White House bid however, he's tempering that last idea a bit. 'I'm for having a conversation with the country about how we find some solutions,' Perry told Politico Monday. 'Having the states doing it is one of the ways.' In the past, Perry has said something similar -- but he definitely put more emphasis on blowing up Social Security..On the now-defunct Parker-Spitzer show last November, Perry and host Eliot Spitzer got into it over what to do about Social Security. Much of the focus was on letting 'the states decide' if the current Social Security system is 'what's best' for them."

Perry's immigration views show that successful leaders have to compromise, writes Michael Gerson: "Perry supported a bill to give in-state tuition to the children of illegal immigrants. This position may have resulted from personal conviction. It certainly reflected a political reality in Texas, where Republican success has involved outreach to Hispanic voters. 'We must say to every Texas child learning in a Texas classroom,' Perry argued, ''We don’t care where you come from, but where you are going, and we are going to do everything we can to help you get there.' And that vision must include the children of undocumented workers.' So three prominent Republican governors can be accused by conservative activists of ideological impurity -- Pawlenty on climate, Romney on health care and Perry on immigration. Yet maybe this is not a scandal but a lesson. Successful governors accommodate a diverse electorate within the bounds of their convictions."

Rise of Skynet interlude: A robot that can run almost seven miles an hour.


A court struck down the administration's drilling policy, reports Ryan Tracy: "A federal judge has struck down an Obama administration policy concerning drilling on public lands, raising the possibility that more permits will be issued for oil and gas companies. But it wasn't clear Monday how the Interior Department, which processes the permits, would respond. The ruling, issued Friday by the U.S. District Court in Wyoming, rejected a policy that had required more extensive environmental review of some drilling permits. The Interior Department 'had no authority' to adopt the policy last year 'without public notice and an opportunity for comment,' Judge Nancy D. Freudenthal wrote. She ruled in favor of an industry group and vacated the policy nationwide. An Interior Department spokesman said the agency was reviewing the ruling and declined to comment further."

The EPA won't toughen carbon monoxide rules, reports Andrew Restuccia: "The Environmental Protection Agency opted Monday not to strengthen existing air-quality standards for carbon monoxide, a move that was met with immediate frustration by clean-air and public-health groups. The EPA said a 'careful review of the science' showed that the existing standards protect public health and the environment. The standards, which were set in 1971, allow 9 parts carbon monoxide per million to be emitted over an eight-hour period. '[Carbon monoxide] levels at monitors across the country are quite low and are well within the standards, showing that federal, state and local efforts to reduce CO pollution have been successful and are providing important public health protections to all Americans,' the EPA said in a statement."

Green groups are challenging the EPA's exemption for biomass in greenhouse gas rules, reports Ben Geman: "Green groups have filed a lawsuit challenging the Environmental Protection Agency’s decision to exempt, at least for now, biomass power plants from greenhouse gas permitting rules that began phasing in this year. EPA in January announced it would delay permitting for power plants and other facilities for three years. But the groups challenging the decision on Monday cited threats to forests, especially in the Southeast. 'The South is already seeing a huge uptick in the number of new and retrofitted facilities that will burn woody biomass, which will create increasing pressure to cut native, standing forests for fuel,' said Frank Rambo of the Southern Environmental Law Center, which is representing Georgia ForestWatch and Wild Virginia in the lawsuit."

Closing credits: Wonkbook is compiled and produced with help from Dylan Matthews and Michelle Williams.