Jonathan Chait

Why Conservatives Abandoned Monetarism

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Will Wilkinson asks why conservatives have almost uniformly abandoned Milton Friedman's monetarist views in favor of various hard-money approaches:

Mr Friedman died a beloved figure of the free-market right. Yet it does seem that his influence on the subject of his greatest technical competence, monetary theory, immediately and significantly waned after his death. This suggests to me that Friedman's monetary views were more tolerated than embraced by the free-market rank and file, and that his departure from the scene gave the longstanding suspicion that central banking is an essentially illegitimate criminal enterprise freer rein.

I see two factors at work here. First, Friedman, in his time, was counterposed against the more big government alternative of Keynesian fiscal policy. The height of Friedman coincided with the height of liberal confidence in using Keynesian policies to fine tune the economy. (Ironically, many center-left economists concluded that liberals took this way too far, wanting to use fiscal policy to respond to even mild downturns, and believed it should be reserved for liquidity traps. Many of those same liberals -- I'd count Larry Summers and Paul Krugman among them -- are looking at the gravest economic crisis since the depression and saying, yes, this is the time for Keynes.) Friedman thus represented the "conservative" vision of anti-recessionary policy.

Second, what you're seeing now is less an intellectual change than a simple partisan one. When George W. Bush was president and the economy turned down in 2001, essentially nobody on the right questioned the need for the Federal Reserve to cut interest rates. The level of interest in Austrian economic thought at the time was zero. I quickly pulled up a few articles from the Washington Times, which is the easiest searchable database of mainstream movement conservative thought circa 2001. A small sampling follows.

Donald Lambro, April 23:

Alan Greenspan and the Federal Reserve Board, trying to repair the damage they did to the U.S. economy with six straight interest-rate boosts, seem to have learned a valuable lesson - at our expense.

Remember when Mr. Greenspan said interest-rate increases were needed in 1999 and early 2000 to cool the economy in order to keep an inflationary Godzilla (which only Mr. Greenspan could see) from terrorizing us? In fact, there never was any inflation to speak of.

Washington Times editorial, May 15:

On four previous occasions this year, Federal Reserve Chairman Alan Greenspan and his central bank colleagues have slashed short-term interest rates by one-half percentage point, cumulatively reducing the federal funds rate to 4.5 percent from 6.5 percent. If the Fed waited too long to respond to the economy's slowdown, the subsequent enthusiasm with which the Fed has cut interest rates has gone a long way toward compensating for any delay in its initial response. However, the Fed's work on the monetary-policy front at this stage in the business cycle is not finished. When the monetary policy-making committee meets today, another one-half percentage-point cut is in order. 

 

Jack Kemp, October 31:

My best reading of the economic data is that we are in a deflationary recession inadvertently created by the Federal Reserve Board...

Congress and the president must demand an end to deflationary monetary and insist that the Fed replace discretionary monetary policy based on targeting short-term interest rates with monetary policy based upon targeting market price signals.

News story, November 7:

House Speaker J. Dennis Hastert applauded the Fed's action and called on the Senate to follow the House's example and pass an economic-stimulus package that could be on President Bush's desk by Thanksgiving.

"I believe it's fairly obvious that more than just rate cuts are needed" to restore lost jobs and get the economy growing again, the Illinois Republican said.

(Note the appearance here of fiscal stimulus, another concept Republicans embraced when a Republicans was in the White House, despite a dramatically weaker case for it on the merits compared with 2009-2011.)

I don't think conservatives have all adopted hard money views out of conscious cynicism. Rather, it's a familiar psychological process. Their understanding of monetary policy is shallow. Their understanding that economic growth is the key variable impacting their return to power is keen. They're going to be attracted to an argument that tells them that any measures to boost growth, whether fiscal or monetary, will have dangerous side-effects.

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