As we long for less divisive times, consider the case of Governor Perry’s comments yesterday about Federal Reserve chief, Ben Bernanke. While campaigning in Iowa, Rick Perry said this:
If this guy prints more money between now and the election, I dunno 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 history is almost treasonous in my opinion.
If Bernanke were full-bore “treasonous” and convicted of same, he would be subject to the death penalty. Perhaps “almost treasonous” would land him just a life term. But setting to one side the extreme nature of this rhetoric of high crimes, consider what Perry’s comments imply about the sort of monetary policy he would like to see.
The substance of Perry’s complaint is that the Federal Reserve’s policy is too “loose.” That is, he believes loans are too easy to come by, interest rates are too low, and the U.S. economy is being over-stimulated. How strange. The primary risk of a monetary policy that is too stimulative is runaway inflation. So it’s difficult to see where Perry is coming from. The highest inflation we have seen since the “Great Recession” began is about 2.5%. That occurred about 6 months ago, when purchases of commodities (food, oil, metals, etc.) by developing countries like China were outstripping available supply. Those are temporary concerns, rather than things that get built into longterm inflation, a point good economists have made for months. (See Krugman, for example, here, here, and here.) While some doubted it for a time, it’s difficult to see how it can be doubted now. The bond market now expects inflation over the next two years to run at about 1%, a rate so low by historical standards that it may be portending deflation, rather than inflation.
While an extended period of generally falling prices throughout the economy might sound like a nice fantasy, it would be awful. Spiraling deflation is the defining characteristic of a depression. And it is awful because it leads rational people to delay buying all but necessities based on the belief that, by simply waiting another month (or a year or two years), they can buy the same thing at a lower price. When few are buying — as night follows the day — few also will be needed for building, making, and selling, which leads to more layoffs. This further reduces aggregate demand. And so it goes. Economies can spiral downward in this fashion for a decade or more, as in the 1930s. Is this not a risk Governor Perry is concerned about?
And on what basis does he believe that too many loans are being made? While interest rates are low for those who can get a loan, too few borrowers qualify. Lending standards remain so strict that banks won’t lend even mortgage money to any but the most creditworthy borrowers. That’s what makes this, to use the textbook term, a “liquidity trap.” It’s a period — one typically following on the heals of great financial panics of the 1929 kind (and the 2008 kind) — when interest rates are very low, but banks are chronically reluctant to lend. So it’s difficult to see how a knowledgeable person who’s been paying attention could conclude that monetary policy is too loose. It’s much more likely that it’s too tight, implying that the Fed should stimulate more, not less.
What bothers me more than Rick Perry’s poor understanding of economics is his willingness to speak so recklessly about it, the truth be damned. His comments also reveal a disturbing ignorance of the law (or perhaps an even more disturbing disrespect of laws in general). Congress did not charge the institution Bernanke leads to pursue a policy of zero inflation. To the contrary, Congress has charged the Fed with striking a balance between the two goals of managing inflation and promoting full employment. So, putting the kindest spin possible on Perry’s remarks, it’s clear he believes the current balance between inflation and unemployment is grossly out of whack. While this is true, Perry has it backwards. Is 1% inflation not low enough? Are 20 million unemployed, together with another 5 million or so underemployed, too few?
Even if he were to answer “yes” to both questions, on what planet is it considered presidential to accuse a public official who is doing his best to follow the law of committing a high crime? If Perry would like to see the Full Employment and Balanced Growth Act repealed and replaced with a statute that requires the Fed to pursue a policy of zero-inflation-no-matter-what, wouldn’t it be more grown-up, more civilized, to simply say so, rather than to drop dark hints that perhaps violence should be done to the Fed chief? Or perhaps in declaring — “I dunno what y’all would do to him in Iowa but we would treat him pretty ugly down in Texas” — Perry merely intended to imply that no bedtime chocolate would be placed on Bernanke’s pillow during his next stay in Austin.