The GOP and Monetary Policy

quantitative_easing

Republicans and the GOP often repeat that liberals don’t understand economics. While I certainly won’t claim that liberals are economic connoisseurs, I don’t think republican politicians and pundits should be so quick to claim the title of market experts.

Let’s take “Quantitative Easing” as an example. In simple terms, QE can be viewed as an asset swap. As Cullen Roche explains:

The Fed simply electronically swaps an asset with the private sector. In most cases it swaps deposits with an interest bearing asset. They’re not “printing money” or dropping money from helicopters as many economists and pundits would have you believe. It is merely an asset swap.

Here’s another useful description from Edward Harrison:

Quantitative easing is an asset swap. The Fed creates electronic credits and swaps them with existing financial assets. If the Fed is buying government paper, it is essentially trading one government liability for another, swapping a demand deposit electronic credit for a longer-dated government liability.

QE is an unconventional form of open market operations. Rather than purchase short term safe assets (government bonds), the central bank purchases long-term and risky assets. These assets include treasury securities, mortgage-backed securities, municipal bonds, and other public and private financial instruments. QE uses permanent open market operations to conduct large scale asset purchases, which deviates from normal monetary policy. To put it another way, the Fed is purchasing long term financial assets from private institutions (e.g. commercial banks) as opposed to the usual policy of buying and selling government bonds. The Fed (or any central bank) does this when interest rates are close to zero and normal monetary policy can no longer lower interest rates. So while the Fed alters the composition of financial assets in the private sector, it doesn’t add any net financial assets.

QE works through a number of transmission mechanisms. The St. Louis Fed lays out a simple picture here:

When the Fed makes such purchases of, for example, Treasury securities, the result is an increased demand for those securities, which in turn raises their prices. Treasury prices and yields (interest rates) are inversely related: As prices increase, interest rates fall. As interest rates fall, the cost to businesses for financing capital investments, such as new equipment, decreases. Over time, new business investments should bolster economic activity, create new jobs, and reduce the unemployment rate.

If you want a more detailed discussion of these mechanics and mechanisms, see these posts by Cullen Roche, this post by Edward Harrison, this post by Miles Kimball, and this speech by Ben Bernanke. I don’t need to get into any specifics for the purpose of this post.

I just described the very basic mechanics of QE. It took me about 5 minutes to find these articles, 30 minutes to read them, and 45 minutes to digest all the material. While you do need a basic background in economics to sift through the jargon, this material isn’t terribly difficult. I could understand if people botched some of the details, which I purposely left out. I could also understand if people didn’t completely understand the mechanics or transmission mechanisms. I wouldn’t even be surprised if I made a few mistakes in the above description. But many Republican politicians and pundits can’t even get past step one. They constantly conflate QE with “money printing” or say that it is “monetizing” the debt. These claims are all bunk.

Here are quotes from some prominent Republican politicians, journalists, and pundits. They come from campaign slogans, journal articles, and news appearances. If the confusion doesn’t raise eyebrows, then there is a problem:

“After four years of stagnant growth, falling incomes, rising costs, and persistently high unemployment, the American economy doesn’t need more artificial and ineffective measures. We should be creating wealth, not printing dollars. As president, Mitt Romney will enact bold, pro-growth policies that lead to robust job creation, higher take-home pay, and a true economic recovery.”Lanhee Chen, policy director from the 2012 Romney campaign

“Quantitative easing of this kind, where we are buying our own debt and printing the dollars to be able to buy that debt is really kind of the last batch of antibiotics.” Glenn Beck (from 7:26 – 7:38)

“We are a bankrupt country – $60, $70, $80 trillion in debt – quantitative easing, printing money from thin air,” Sarah Palin

“Quantitative easing and the concomitant ex nihilo creation of money will undoubtedly impact the inflation rate. Unsettlingly, it remains to be seen where inflation would settle after the proposed implementation of a second quantitative easing.”Michelle Bachmann

“We don’t need sugar high economics; we don’t need synthetic money creation. We want wealth creation. We don’t want to print money. We want opportunity and growth. And when they do this to our money, it undermines the credibility of our money.”Paul Ryan

“When officials of the Federal Reserve System speak in vague and lofty terms about “quantitative easing,” what they are talking about is creating more money out of thin air, as the Federal Reserve is authorized to do — and has been doing in recent years, to the tune of tens of billions of dollars a month. When the federal government spends far beyond the tax revenues it has, it gets the extra money by selling bonds. The Federal Reserve has become the biggest buyer of these bonds, since it costs them nothing to create more money. This new money buys just as much as the money you sacrificed to save for years. More money in circulation, without a corresponding increase in output, means rising prices.”Thomas Sowell

“Adding all the quantitative easing up, QE1, QE2, QE3, since 2008, since the financial crisis, the amount of money that they basically created out of thin air, just printed, or digitized and added to financial ledgers, is over a trillion dollars that has no basis in reality. There’s been nothing that has happened that would have produced it. There hasn’t been any economic activity undergirding it. There’s no reason for it to have happened. But the Fed can do this. They can print it. They can add it wherever they want. They can add it to the money supply. They can give it to put it in accounts that end up being active in the stock market, and the theory has been — guess what? — that that will trickle-down. I’m not kidding.”Rush Limbaugh

“The Federal Reserve has expanded our money supply by trillions, benefitting Wall Street but making life harder for millions of Americans struggling to make ends meet. Never-ending quantitative easing threatens to undermine the dollar and to drive up prices on everyday goods from food to gasoline to the basic necessities of life.”Ted Cruz

“Yellen’s confirmation will warm the chilly heart of Wall Street, which fears “tapering” — slowing the $85 billion per month pace of buying bonds, aka printing money — even more than it seemed to fear the possibility of a default. She probably will continue, perhaps even longer than the departing Ben Bernanke would, the “quantitative easing” that is “trickle-down economics” as practiced by progressives.” George Will.

“If this guy prints more money between now and the election…..we will treat him pretty ugly. I mean, printing more money to play politics at this particular time in American history is almost treasonous.” My favorite quote via Rick Perry

These are just ten quotes from ten people. If I really wanted to, I could have found hundreds. And these people control our public discussion on all sorts of economic matters. Again, I won’t claim that liberals are much better, but you don’t see economic illiteracy of this magnitude from them, at least when it comes to monetary policy.

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7 Comments

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7 responses to “The GOP and Monetary Policy

  1. Blue Aurora

    Yes, comments like these illustrate how dramatically changed the Republican Party has become over the last three to four decades. Earlier generations of Republicans wouldn’t have been so opposed to the idea of the public sector having a place in the economy. I have a feeling that even Milton Friedman might be surprised at the extent of opposition to any public sector having a role, despite his over-the-top rhetoric at times.

    That stated…why didn’t you name Allan H. Meltzer? (He wrote the excellent A History of the Federal Reserve, Volume I: 1913 to 1951, A History of the Federal Reserve, Volume II, Book 1: 1951 to 1969, and A History of the Federal Reserve, Volume II, Book 2: 1970 to 1986.) Or for that matter, the statements of the late A.J. Schwartz?

    Both of them made statements that indicated that they were concerned more about inflation than deflation, even when their own scholarly work indicates that inflation wasn’t really a dire issue.

    • You certainly have a point about Meltzer and Schwartz. I could have also named some other scholars, Bob Murphy and Niall Ferguson are just two examples.

      For one, all I wanted to focus on were the “money printing” and “monetizing the debt” quotes. These are statements that show that these people don’t even understand the basic mechanics of QE. With Meltzer and Schwartz, I assumed that they had a more technical perspective (I haven’t read their statements on inflation and QE). They may have taken issue with the transmission mechanisms or maybe even some of the important details on the mechanics, but that is outside that bounds of this post in that it doesn’t show economic illiteracy per se.

      I might be wrong here, but I could talk about that in another post.

      • Blue Aurora

        Your reasons for not including A.H. Meltzer and A.J. Schwartz are understandable. However, the reason I raised their names isn’t because I think they’re being economic illiterates. I raised their names because they have said that they have concerns which can be seen as contradicting their earlier academic research.

  2. I suppose that sophistry replaces reality and things observed can become things to ignore if those observations don’t fit into one’s worldview (a priori) hence the increase in the Fed’s balance sheet and the various incarnations of QE framed as ‘money printing’ continue to parroted by commentators of this ilk as a precursor to hyperinflation and the end of civilization; it does not matter to them that their predictions are grounded on quicksand.
    As you know from studying GT: “The object of our analysis is, not to provide a machine, or method of blind manipulation, which will furnish an infallible answer, but to provide ourselves with an organised and orderly method of thinking out particular problems; and, after we have reached a provisional conclusion by isolating the complicating factors one by one, we then go back on ourselves and allow, as well as we can, for the probable interactions of the factors among themselves. This is the nature of economic thinking (Keynes, 1936: 297).

    • That is a fantastic quote. I’m still not that far in the GT, but I’m slowly slogging through it.

    • Blue Aurora

      That quote on Page 297 is found in Chapter 21, which is part of Book V of The General Theory. That section is relatively overlooked, and it is also in that section where J.M. Keynes compares his mathematical model with the mathematical model found in The Theory of Unemployment by A.C. Pigou (1933). There’s a reason J.M. Keynes chose that 1933 work as his target.

  3. Monetarist Conservative

    I agree with you for the most part in regards that republicans call people ¨economic illiterates¨ while they have no actual understanding of economics. I am a republican however I am in agreement that people like Perry and Palin are ignorant. My one complain is with your complaint with Thomas Sowellś quote. Sowell is simply pointing out that QE has expanded the money supply in record numbers along with other federal reserve policy. Now although ¨printing money¨ is not the best way to explain what the federal reserve does, it still points out the underlying fact of the money supply being expanded. Lastly, Sowell says this would cause higher prices, this is Sowell just using the Quantity Theory Of Money (MV=PY). So in regards to Sowell I do not understand the problem however overall we are in agreement.

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