Less is more?

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How Republicans Would Really Run the Fed

Jonathan Bernstein is a Bloomberg View columnist. He taught political science at the University of Texas at San Antonio and DePauw University and wrote A Plain Blog About Politics.
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What will Republicans do about monetary policy if they win the presidency?

Answer: We really don’t know. This isn’t like taxes and the budget, where they have a clear position and a history of following through.

Based on what their candidates say in presidential debates, Republicans are now the party of tight money. Inflation, they say, is an enormous threat, and the Federal Reserve’s policy of keeping interest rates low and pumping money into the economy risks disaster.

Many GOP candidates say inflation is already strong, despite all evidence to the contrary. Rand Paul in the Fox Business Network debate referred to people hit hard “as your prices rise or as the value of the dollar shrinks.” In the CNBC debate, Ted Cruz cherry-picked a few items that have risen in price and concluded that “loose money is one of the major problems.” He claimed that the gold standard produced “booming economic growth and lower inflation than we have had with the Fed now.”

As Matt O’Brian at Wonkblog documents, this is nothing new; conservatives have been panicking about inflation throughout the Obama presidency. But it’s also true, as Vox’s Timothy B. Lee says, that tight-money mania hasn’t always been conservative orthodoxy.

In that respect, monetary policy is an issue, like health care, immigration and economic stimulus, where Republican policy appears to be mainly a reflexive instinct to oppose whatever Barack Obama supports. We don’t know how many positions they are taking now that will stick once Obama is off the scene, and especially if a Republican is in the White House.

We do know -- as Lee points out -- that rigid support for tight money regardless of the situation would be incredibly risky for a future Republican president. And it’s an area where this Republican president’s interests would be closely aligned with those of the rest of the party.

The biggest leverage presidents have over the Federal Reserve is in nominating its chairman and the rest of its board of governors. A future Republican president would (presumably) take care of that before a new recession began. If the economy picks up even more by early 2017, everyone will agree that interest rates should rise. The danger then would be if a Republican president picks inflation hawks when Fed openings arise. He would be locked into a tight-money policy even when the needs of the economy change.

So what will be stronger: Obama-era conservative orthodoxy that high inflation is right around the corner or possibly already here? Or the political self-interest of a Republican president and other party elected officials? To put it another way: Is the party's dysfunction so strong that future Republican presidents will systematically miss major political threats?

Figure that one out, and you’ll know more about monetary policy in the next Republican administration.

  1. There was plenty of goldbug crankery, too. See my View colleague Megan McArdle's thorough takedown of that part of the discussion as well as her good analysis of Republican inflation fears. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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Jonathan Bernstein at jbernstein62@bloomberg.net

To contact the editor responsible for this story:
Katy Roberts at kroberts29@bloomberg.net