Breaking! A Republican presidential candidate has said something interesting about monetary policy, and it’s Texas Senator Ted Cruz, which makes it doubly interesting.
Cruz, best known for alienating his Republican colleagues with futile procedural grandstanding in the name of radical conservatives, has usually joined his party’s mainstream in criticizing low interest rates from the Federal Reserve. Along with fellow presidential candidates like Rand Paul and Ben Carson, Cruz has generally suggested that tying the value of the dollar to gold would be a good idea.
But economists of almost all stripes tend to think that this would be a very bad idea. Linking the value of your dollar to a mineral, however scarce, exposes it to the risk of arbitrary shocks—new mines are discovered, or a Bond villain nukes Fort Knox—and also means monetary policy will have a harder time matching the changing conditions of the economy.
But the Washington Examiner’s Joseph Lawler has found Cruz is shifting directions in an intriguing fashion. He has begun echoing critiques made by a group of economists known as Market Monetarists, who have, since the Great Recession, developed an influential critique of monetary policy that has caught on among the party’s small wing of establishment reformers.
In particular, a central contention of these economists is that the Federal Reserve actually made the 2008 recession worse with monetary policy that was far too tight, and that similarly tight monetary policy in the wake of the crisis kept the US economy from recovering as quickly as it otherwise could have.
At a hearing last week with Federal Reserve chair Janet Yellen, Cruz put this critique to her directly, asking if the Fed should have eased monetary policy more quickly in 2008. She seemed confused by the question, noting that the Fed had been in the process of cutting rates at the time, but fans of Market Monetarism quickly took note of Cruz’s line of questioning.
Yellen’s confusion gets at the debate between Market Monetarists and mainstream economists like Yellen, former Fed chair Ben Bernanke, or Harvard’s Greg Mankiw, who tend to see the 2008 Fed as having been in the process of loosening credit conditions to fight the recession: The federal funds rate was cut that year in March and April, twice in October, and again in December. It hasn’t gone up since.
But Market Monetarists like Scott Sumner and David Beckworth argue that Yellen and Bernanke are looking at the wrong measures. Forget rates in the second half of 2008, and look at the stock market, bond yields, and foreign exchange rates, all of which indicated deeply tightening credit conditions. By standing pat from April to October, the Fed, they argue, was in effect tightening—it should have resumed the rate cuts sooner, and gotten an earlier start on additional measures, like the asset purchases otherwise known as quantitative easing (which didn’t get announced until November that year).
The holy grail for these economists is an approach to monetary policy called nominal GDP level targeting. The argument, put simply, is that instead of trying to balance the demands of price stability and full employment, central bankers should aim their policies at increasing the output of their economy by 5% each year, and let inflation and employment take care of themselves. If monetary policy makers fail to meet their goal one year, they must make up for it with higher growth the next. This paper (pdf) offers a more detailed explanation of the idea.
The Market Monetarists’ analysis implies that, since 2008, monetary policy has been far too tight, with nominal GDP (NGDP) growth approaching 5% in just three quarters. That has put the group in the strange position of aligning with more liberal critics of the Fed to defend the central bank’s various QE programs and urge a delay in raising rates.
Which, in turn, puts Cruz in a funny position: Beyond right-wing bromides comparing the Fed to a torture chamber, his rhetoric mocked “this incredible experiment of quantitative easing, QE1, QE2, QE3, QE- infinity,” and warned that high inflation is crushing poor moms at the grocery store as the dollar crumbles. Market Monetarists like Sumner, a professor at Bentley University and the director of the program on monetary policy at the libertarian-leaning Mercatus Center at George Mason University, would say the opposite—that more must be done to loosen monetary policy, inflation isn’t a problem right now, and the dollar is getting too strong.
“Every conservative who’s been complaining that Bernanke’s running an inflationary monetary regime needs to read this post, and verify the accuracy of my NGDP and CPI data,” Sumner wrote in a 2012 blog post. “And then admit they made a tragic mistake.”
If Cruz can admit he’s been worried about the wrong problem, then there are good reasons for him to embrace Market Monetarist theories. If we assume his love of the gold standard and his wailing about Obama and Bernanke debasing the dollar has more to do with fitting in with the know-nothing Republican crowd than any real thought on his part, and that he is thus willing to set those things aside, there are plenty of conservative attractions in Market Monetarism.
In particular, it draws from a strain of conservative thought dating to Milton Friedman that suggests a well-run monetary policy—one that limits or obviates recessions—will make it far less likely for the government to intervene directly in the markets through bailouts, taxes, and spending. This approach stands against the idea that fiscal stimulus is a helpful policy, which is one reason economist Paul Krugman isn’t a huge fan.
The Market Monetarist approach also provides a better foundation for conservative demands that the Fed follow mechanical monetary-policy rules. While many Republicans prefer some form of the Taylor Rule, which prescribes an interest-rate regime for price stability, it isn’t hugely useful when high inflation isn’t the problem. Targeting output is already something the Fed experimented with under the so-called “Evans rule.” Nominal GDP targeting could strike a balance between the discretion Fed officials want, and the accountability the public desires in an institution whose targets and forecasts remain hard to square with the recent results.
If Cruz still needs convincing that he can sell these arguments next to the Trumps and Carsons of the world, there’s still a kooky, right-wing utopia at the end of the nominal GDP rainbow. Sumner argues that under his fully evolved monetary policy regime, the Federal Reserve would mostly respond to a nominal GDP futures market where speculators bet on future economic output.
“In essence, the market, not the central bank, would be setting the monetary base and the level of interest rates,” Sumner writes. “[O]nce government is that far removed from the process, it is relatively easy to move to free banking”—that is, a regulation-free financial system. Now, we’re talking Tea Party. And Cruz, it seems, is listening.