Janet Yellen is just finishing up her confirmation hearing before the Senate Banking Committee right now. She breezed through it. She handled even the dumbest questions masterfully. She emphasized her view that with inflation low, and unemployment high, the Fed should be concerned about jobs above all else. She said possible asset bubbles were concern, but primarily one for regulation, not for monetary policy. Yellen will likely proceed to a quick confirmation as Chair of the Federal Reserve.
The people who should be most concerned about the hearing are Republican policy elites. Many Republicans on the committee tacitly embraced deflationary, Herbert Hoover-style economics, which many GOP wonks know well would be devastating to the economy.
Because the American economy has been stuck at the zero lower bound (where the Federal Reserve has cut interest rates as far as possible) for five straight years now, and absent reform of the Fed’s structure to give it more tools — to enable giving newly printed money straight to every citizen, for example — it is likely to bounce off that floor again and again in coming decades. At that floor, and with no help from Congress, the Fed’s unconventional stimulus programs are all that is keeping the economy on its feet. And if Republicans take power at or near that floor, and proceed to appoint a Fed governor that will enact harsh Hoover-style monetary policy, they will incite a rapid recession.
Earlier this year I wrote a piece looking at a set of conservative “reformists,” who have made some limited success in trying to nudge the policy conversations in some Republicans circles. Their biggest success (inspired by the economist Scott Sumner, and the ideas of Milton Friedman) has been coalescing around a pro-monetary stimulus agenda (in contexts which merit it, like now). This is an admirable intellectual development, given the party’s traditional fixation on inflation.
But little of this has percolated through the broader party. During the hearing Senator Shelby (who, it was clear, had no idea what he was talking about) halfheartedly tried to tie the Fed’s monetary stimulus program to Keynes. Senator Heller asked what drives gold prices. Senator Corker said that “easy money is an elitist policy.” Senator Toomey said “the adverse consequences of [stimulus] are punishing savers,” implying that the Fed should raise interest rates. On balance, the committee’s Republicans clearly favored tighter money, which has to have Milton Friedman spinning in his grave.
And this fits right in with the GOP background. Here’s Kevin Warsh in the WSJ wringing his handkerchief about the Fed’s stimulus programs. David Vitter and Bob Corker have introduced a bill to repudiate the Fed’s legal mandate to keep unemployment down, an idea Paul Ryan has supported. Or consider Senator Pat Roberts warning about Yellen’s “destructive and inflationary policy.” And all this comes at a time when inflation is at historic lows! I think this tends to reveal that conservatives are very uncomfortable with the idea that competently managing a powerful government bureaucracy is absolutely critical to long-term prosperity, despite the fact that failing to do so cast them out of power for a generation.
But in any case, these are dangerous ideas, both for Republicans and the country. Some might argue that this is all to the good, that the GOP needs to be broken of its nutty economic beliefs by a dozen or so consecutive shellackings at the ballot box. But what preceded FDR was almost a whole presidential term of ~20% unemployment. It would be best for everyone if Republicans could lead themselves back to Milton Friedman’s wisdom without massive collateral misery.
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