The Money Is Too Damn Tight!
During the elections of 2008 and 2012, the rise of libertarian Ron Paul on the American Right introduced the Republican Party to his strain of Austrian economics. And while the GOP did not endorse it wholesale, the presence of Paul has influenced to some degree the "party line" perspective -- making more visceral its opposition to government, lessening the emphasis on promoting business as the end of tax and regulatory policy change.
Looking broadly through the postwar era, this is an anomaly. During the Eisenhower, Nixon, and Ford administrations, Republicans maintained down-the-line Keynesian economic policies. During the Reagan and Bush administrations, Republican economics revealed a mix of influences: Keynesian on government spending, supply-side on taxes and regulation, monetarism at the Federal Reserve.
Most noticeable, in fact, has been the change of perspective on monetary policy. Where Republicans once lauded the conduct of Fed Chairmen Paul Volcker -- a Democrat, incidentally -- and Alan Greenspan, they have forsaken their legacy amid the recent shift to the right.
I am reminded in particular by Rick Perry's comment about Chairman Ben Bernanke, who George Bush appointed in 2006:
If this guy [Bernanke] 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.Paul notwithstanding, Republican views accord much more with Perry than they ever did. Milton Friedman rolls over in his grave whenever he hears Romney disparage current monetary policy as accommodative or as a spent force.
All of this is to say that I was pleasantly surprised by Steve Chapman's recent article, which ran in the conservative Chicago Tribune and on the libertarian Reason magazine's website:
Remember the guy who ran for governor of New York as the candidate of the Rent Is Too Damn High Party? We need a new one, called the Money Is Too Damn Tight Party. It would get my vote...[I]nflation-phobes resemble someone stranded in the desert without water who spends his time frantically searching for a life preserver. Plenty of people, including several Republicans who ran for president, think money is too loose. But what would the world look like if the opposite were true?...Commodity prices would fall. Unemployment would be painfully high. People would be reluctant to buy houses for fear they would lose value. Economic growth would stall. Sound familiar? Those signs are a tipoff to our real economic problem: too few dollars in circulation...Could inflation make a comeback? Sure. So could the Soviet Union. But until it does, we should deal with dangers that are not imaginary.It's a worthwhile read, for sure. A few friendly comments for Chapman:
1. Gold is not only (or maybe not really) a hedge against inflation; it tends to rise in times of financial instability, which increase the premium for real "safe haven" assets. Gold demand has risen in the past few years due to increasing wealth in emerging markets.
2. When you are trying to explain the behavior of commodity prices and interest rates, the stronger relationship tends to be with nominal income, rather than inflation or the price level.
3. It may be helpful to consider a distinction between supply- and demand-side inflation, although I imagine you didn't want to get too technical in your op-ed, in regards to the inflation of the 70s. When Americans think of inflation, they think of the 70s -- and although there was demand-side inflation then which I wouldn't defend, there was also, to a meaningful extent, supply-side inflation generated by oil prices. Demand-side inflation tends to increase both nominal and real income in the short run, whereas supply-side inflation tends to increase nominal income, but decrease real income, in the short run. So the 70s, and thereby all inflation, gets linked to the diminution of real incomes. That's not an association you want, so it tends to be easier (and more theoretically sound) to talk about nominal income. (See here too.)