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Note to Down-Ballot Republicans: It’s All About the Fed

When thinking about the wedge issues that down-ballot Republicans should run on this fall, surely some of those that come to mind are Obamacare, illegal immigration, the Supreme Court, and decimating Islamic State.  In other words, the attention-grabbing, flashy issues.

Allow me to make an unusual suggestion: Conservative Republicans across the country, running down-ballot from the top-line plutocratic orange overlord, would be wise to publicly lament the status quo of our sclerotic Federal Reserve regime and offer positive reforms to the way the nation conducts monetary policy.  In addition to being the right thing to do, on the merits, focusing on monetary policy reform would actually also make for great politics.  Here’s why.

Firstly, Republicans should be able to effectively wield criticism of the Ben Bernanke/Janet Yellen-led Fed as a shield to riposte the inevitable Leftist shrills about exacerbating income inequality and the old canard that Republicans are the “party of the 1%.”  Since the 2008 crash, the Fed’s basic policy tool set has primarily consisted of two prongs: (1) a longtime zero interest rate policy in the target federal funds rate (referred to as “ZIRP,” and only recently ended by Chairman Yellen), and (2) multiple rounds of “quantitative easing” (“QE,” for short), which is just a fancy way for economists to say they purchase Treasury debt and print money as a means of driving down long-term interest rates.

There are plenty of criticisms of this emergency policy—and, in particular, its scope and duration, since Bernanke’s immediate post-2008 crash response (centered around the first round of quantitive easing, or “QE1”) was based largely on his own scholarship that one reason for the Great Depression’s length was that the Fed failed to initially act assertively, at the outset.  (For whatever it’s worth, Bernanke was actually agreeing here with no less a free market icon than Milton Friedman, who famously argued that, given the existence of the Fed, it is monetary—and not fiscal—policy that must be effectively utilized in such national emergencies.)  Conservatives, vigilant of the sorry history of inflation quite literally ruining nations, have been rightfully skeptical of the potentially insidious effects of such excessive money printing.  Conservatives have also oftentimes questioned the purported “independence” of the Fed, considering the Fed’s serial Treasury bond purchases only mask to shift our debt from the transparent Treasury balance sheet to the mysterious Fed balance sheet, artificially distort long-term interest rates by keeping them lower than what the market would naturally suggest, and thus only abet politicians’ insatiable desires for more and more spending.

I agree with all of these criticisms.  But there is actually one last criticism that would be particularly politically potent this fall.  For years now, conservatives have pointed out how a combined ZIRP + QE monetary policy amounts to a de facto diktat to investors and savers to shift out of fixed-income investments (which, by definition, are returning barely anything, especially in prospective real terms, given perennial fears that the QE inflation chickens might come home to roost) and into much riskier (usually stocks) financial asset classes. The logical result of this wealth transfer away from fixed-income assets and toward equity assets has been to harm those (oftentimes the young and the retired) who simply cannot justify the increased risk of constructing a primarily equity-filled portfolio, and to help those who have enough base wealth and risk tolerance to do so.

In other words, the Fed has greatly exacerbated wealth inequality.  Or so conservatives have been warning.  But remarkably, the Fed itself has actually finally come clean and admitted that we have been right all along.  Cue the libertarian-leaning financial blog Zero Hedge, reporting on a May 2016 study released by the St. Louis Fed:

Less than a decade ago, the mere hint that the Fed was either propping up markets or actively pushing them higher was enough to get one branded a conspiracy theorist loon and never again invited to polite conversation.  Since then first Bernanke, and then virtually all central bankers both domestic and foreign have admitted that the ‘wealth effect,’ a polite way of saying pushing up asset prices, has been their primary goal and function…

…we found it quite surprising to read a report by none other than the St. Louis Fed titled ‘Are Rising Stock Prices Related to Income Inequality?‘, which if answered in the affirmative would be an accidental admission that the Fed itself has been instrumental in creating the widest wealth and income gap ever seen in U.S. history (now even greater than the Great Depression).

To our great surprise the answer was ‘yes.’

Zero Hedge then goes on to directly quote the St. Louis Fed’s study.  It really is quite remarkable:

Regarding the stock returns, the S&P 500 Index grew from 92 in 1977 to over 1,476 in 2007.  By comparison, it grew only 50 percent in the 30 years prior.  The authors noted: ‘As stock prices rise, the gains are disproportionately distributed to the wealthy.  Lower- and middle-income families who are also wealth-poor are less likely to expose their savings to the higher risks of equity markets.’

Owyang and Shell concluded: ‘The increase in income inequality in the 1970s was accompanied, in part, by gains in the stock market.  Comovement between stock prices and income inequality results from the fact that gains in the stock market tend to benefit those in the wealthiest portion of the income distribution, who have better access to and higher participation in these asset markets.’

So, at long last, a branch of the Federal Reserve has published its own study affirming a primary conservative fear of the Bernanke/Yellen-led Fed’s lengthy experiment in ZIRP and hitherto unprecedented QE.  Yes, the Fed has directly exacerbated wealth inequality, and it has done so precisely because of its seeming addiction to the grotesquely market-distorting measures against which free marketeers have so passionately remonstrated.  When Leftists fear-monger on the campaign trail this fall about the nefarious Bush tax cuts and sundry deregulations they claim hurt the “99%” at the expense of the “1%,” conservatives can respond in intellectually coherent and pragmatically sound fashion by explaining why current levels of inequality actually demands monetary policy reform more than it demands any other form of policy response.  Defending the Centennial Monetary Commission Act (which would create a bipartisan commission to consider potentially expansive structural changes to the nation’s governing monetary policy regime) and the Federal Reserve Reform Act of 2015 (which would require greater transparency and a stricter abiding to firm monetary rules, as opposed to more discretionary standards) would be a great place to start.

Secondly, criticism of the Fed status quo and advocacy of positive reforms to our monetary policy system would allow conservatives a potent, strategic opening to contrast their conservatism with the bloviating non-conservatism of the orange-hued clown (presumably) running at the top of the Republican ticket.  Before getting to the merits, let me explain why such a contrast is important.  It is important, quite simply, because building a third-party from scratch is difficult, and because conservatives should still try their best to preserve the GOP as a vehicle for ideological conservatism by preventing it from falling prey to the “intellectual skinheads” of the horrible “alt-right.”  Here is the conclusion of a fun piece Eli Steinberg wrote yesterday at The Federalist, in which he argued that Republican National Convention delegates should essentially nominate an anti-Trump vice president who would spend his time on the campaign trail sabotaging the election for the demagogic New Yorker:

Many conservatives are mourning ‘the death of the Republican Party.’  They see this hostile takeover as their cue to abandon ship, ceding the party to the populists.  But there is no reason to do so.  The Republican Party is a great party, and whatever it would be replaced with won’t be any better.  It is sick and weak, but with the right care, it can be restored to its former glory.  Only if conservatives surrender it to the Trumpists will it really die.  Conservatives need to stand up and fight for their party, because the Grand Old Party belongs to conservatives, not to the naked populists.

I am not sure how realistic a prospect it is for delegates to effectively nominate a troll as the orange guy’s running mate, but I certainly agree with the gist of Steinberg’s peroration.  What I would suggest is that a backup—and a probably more realistic—alternative to nominating a vice presidential troll would be for conservatives running nationally to meaningfully contrast themselves with Trump on an important issue (or two, or three) to the conservative cause.  I think monetary policy—and, especially, how monetary policy interacts with trade—presents a perfect opportunity to distinguish conservatism from Trumpism.

In May, Donald Trump held a wide-ranging phone interview with CNBC in which he “positioned himself on the far left of the political spectrum on fiscal [and monetary] issues, coming out for low interest rates [and] against a strong dollar.”  This affinity for potentially pro-inflationary low interest rates, and a preference for a weak dollar, is anathema to long-held conservative orthodoxy.  The Reagan Revolution, which on the fiscal side was aided by supply-side tax cuts and regulatory streamlining, was only made possible by the complementary efforts of the Paul Volcker-led Fed in famously combatting Carter-era inflation and in strengthening the dollar.  Support for a strong dollar—”king dollar,” as CNBC’s Larry Kudlow has long called it—is conservative orthodoxy for acolyte economists of the Reagan era, such as Art Laffer and the Heritage Foundation’s Stephen Moore.  Furthermore, broader opposition to excessively low-interest, potentially pro-inflationary monetary measures are rampant on the Right, and Texas Congressman Kevin Brady has been notable for legislatively proposing that the Fed eschew its statutorily prescribed “dual mandate”—to maximize employment and temper inflation—in favor of a European Central Bank-style “single mandate” to simply manage inflation.

But Trump’s preference for low interest rates and a concomitantly weaker dollar actually makes perfect sense, given his nonsensically anachronistic economic worldview.  The reality is that Donald Trump’s thoughts on trade would have fit in better in the 1600s than they do in a world where we have access to Adam Smith’s 1776 magnum opus, The Wealth of Nations, and David Ricardo’s famous 1817 work, On the Principles of Political Economy and Taxation.  Put more bluntly, Donald Trump’s policies and rhetoric—his seemingly truly held belief that the “balance of trade” is an economically relevant metric on which to judge a nation, his devout protectionism and support for high tariffs, and his belief that it is exports and not imports that truly matter—are in line with classic mercantilist theory, and are not at all in line with our post-Adam Smith capitalist world.

In a March 10 piece in The New York Times, Binyamin Applebaum succinctly captured this phenomenon in his title, “On Trade, Donald Trump Breaks With 200 Years of Economic Orthodoxy”:

Donald J. Trump’s blistering critique of American trade policy boils down to a simple equation: Foreigners are ‘killing us on trade’ because Americans spend much more on imports than the rest of the world spends on American exports.  China’s unbalanced trade with the United States, he said Tuesday night, is ‘the greatest theft in the history of the world.’

Add a few ‘whereins’ and ‘whences’ and that sentiment would conform nicely to the worldview of the first Queen Elizabeth of 16th-century England, to the 17th-century court of Louis XIV, or to Prussia’s Iron Chancellor, Otto von Bismarck, in the 19th century.  The great powers of bygone centuries subscribed to the economic theory of mercantilism, ‘Wherein we must ever observe this rule: to sell more to strangers yearly than we consume of theirs in value,’ as its apostle, the East India Company director Thomas Mun, wrote in the 1600s.

Now Mr. Trump is bringing mercantilism back.  The New York billionaire is challenging the last 200 years of economic orthodoxy that trade among nations is good, and that more is better…

The fundamental issue here is that mercantilism does not deserve to be brought “back.”  We live in a capitalistic society for a reason, and conservative free marketeers in the Republican Party once upon a time appreciated this.  Applebaum accurately notes, though, that there is probably no single belief that Trump has more consistently championed over the decades than his disdain for free trade and his retrograde mercantilism:

Mr. Trump’s mercantilism is among his oldest and steadiest public positions.  Since at least the 1980s, he has described trade as a zero-sum game in which countries lose by paying for imports.  [In his view,] the trade deficit with China, which reached $366 billion last year, makes America the biggest loser.

This is absolute garbage, from a free market perspective.  Free trade is literally just capitalism, on a global scale.  Ricardian comparative advantage theory (properly) preaches that the freer and voluminously greater trade is, the better off we will be as a society.  Trump also has it completely backwards on exports and imports, and Applebaum quotes the sagacious Friedman for the proposition:

Economists have long struggled against the popular view that exports are a measure of economic vitality while imports are evidence of regrettable dependence.

They argue that the opposite is true.

‘Economists have spoken with almost one voice for some 200 years,’ the economist Milton Friedman said in a 1978 speech.  ‘The gain from foreign trade is what we import.  What we export is the cost of getting those imports.  And the proper objective for a nation, as Adam Smith put it, is to arrange things so we get as large a volume of imports as possible for as small a volume of exports as possible.’

Conservatives’ criticism of the Fed’s status quo—including its artificially low interest rates, its grand post-2008 crash experiment in endless QE, and its pernicious effects on potentially abetting long-term inflation and dollar weakening—would go a long way toward pushing back against this Trumpist economic illiteracy.  By focusing on the Fed, conservatives can simultaneously defend capitalism and free trade, lament an activist Fed’s micro-management and excessive central planning of the economy, resist Leftists’ rhetorical assaults on wealth inequality in an ideologically coherent and consistent fashion, and distance themselves from Donald Trump in a way that meaningfully attempts to preserve the GOP as a partisan vessel for free market conservatism.  It’s a win-win-win-win.

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