Come again?

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What Republicans Get Wrong About the Fed

Ramesh Ponnuru is a Bloomberg View columnist. He is a senior editor of National Review and the author of “The Party of Death: The Democrats, the Media, the Courts, and the Disregard for Human Life.”
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Buck up, philosophy majors: You may have taken a few hits at the latest Republican presidential debate, but central bankers had it worse. The Federal Reserve was accused of everything from hurting savers to worsening inequality to interfering in politics. Candidate after candidate joined the pile-on. Their criticisms are understandable. But they're also mostly wrong.

For one thing, the candidates generally overestimated the power the Federal Reserve has over markets -- a mistake that conservatives, especially, should avoid. Senator Rand Paul and former Senator Rick Santorum attacked the Fed for holding interest rates "artificially" low, with Paul saying that it was punishing savers. But we'd have to know the "natural" rate of interest to judge that claim, and it seems likely that a weak economy has held that rate down.

Former Arkansas Governor Mike Huckabee ascribed even more power to the central bank: "I think the Fed is in big trouble because they haven't addressed the No. 1 issue that's hurting Americans and that's the fact that wages for the bottom 90 percent of the economy have been stagnant for 40 years." The best estimates say that wages haven't actually been stagnant. But anyway, it isn't the Fed's job -- and isn't within its power -- to lift real wages over the long run, and we shouldn't want it to try. Blaming the Fed for sometimes making the boom-bust cycle worse, as Senator Ted Cruz did during the debate, is fair. But there's not much a central bank can do to affect the trends in productivity that largely determine wages.

Several candidates blamed the Fed for increasing inequality because monetary expansion has pumped up stocks. It's impossible to prove what the tighter policy they prefer would have meant for the U.S. over the past few years, but we can look at the example of the European Central Bank. Its tighter policy has been worse for the poor, not better.

Santorum and Donald Trump both said that the Fed was being too political, with Santorum specifying that it had helped President Barack Obama by protecting the country from the negative consequences of his policies. While these remarks fit with the mood of all the other anti-Fed commentary from the candidates, they don't fit logically: The Fed can't be helping Obama by suppressing wage growth, crushing savers and so on.

Behind the critique of the Fed as political is a conviction that its policies have been not just too expansionary but obviously so. Even Fed Chair Janet Yellen, goes the unstated theory, knows that these policies don't serve the long-term interests of the economy; she's just maintaining them for Obama's sake. An alternative view -- that there are reasonable arguments for what the Fed has been doing and that she agrees with them -- seems a lot more plausible.

Economic pundits turn this kind of argument back on Republicans themselves. Why, they ask, are Republicans moaning about money creation when the inflation rate is, by the standards of recent decades, so low? They offer various theories. Maybe Republicans oppose Obama so much that they want to criticize everything that the government is doing under him. Maybe their rich donors have an interest in monetary restraint. Or maybe their aging base is very sensitive to rising prices.

Here's a different explanation. When the Fed is trying to be expansionary, it generally tries to bring interest rates down. Rates have now been low for a long time. The monetary base has expanded a lot during the economic crisis. Expansionary policy tends to raise the rate of inflation, and inflation seems to most people like a bad thing. Put all that together, and it's understandable that people worry that monetary policy is dangerously expansionary.

Conservatives, who formed a lot of their economic thinking in the late 1970s when policy really was too expansionary, are especially prone to this thinking. They have heavyweight economists backing them up in these concerns. And they prefer rules to discretion in the conduct of monetary policy, and therefore dislike the ad hoc and unpredictable way the Fed has been acting in recent years. (Cruz made this point in the debate.)

These premises aren't crazy, but they've led many conservatives to the wrong conclusions. Low interest rates aren't always a sign that the Fed has loosened policy excessively. Sometimes it's appropriate for the monetary base to expand. Modestly accelerating inflation can be an acceptable side effect of otherwise beneficial policies. It all depends on the circumstances. In our circumstances -- those of a depressed economy following the steepest fall in total spending since the 1930s -- there was never a great danger of repeating the inflation of the 1970s. Republican candidates are making misguided claims about monetary policy, in short, because too many conservatives have mistaken the trends of the bell-bottom era for timeless truths.

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

To contact the author of this story:
Ramesh Ponnuru at rponnuru@bloomberg.net

To contact the editor responsible for this story:
Timothy Lavin at tlavin1@bloomberg.net