Earlier this week, a group of conservative economists, business leaders, and journalists published an open letter to Ben Bernanke denouncing the Fed's next round of monetary expansion. They warned that the move risks triggering inflation. They urged instead other unspecified measures to spur economic growth.
Let's think about that.
It should be said at the start: The letter-writers have something of a point. Since September 2008, the Federal Reserve has created more than $2.2 trillion in new money. It now proposes to create $600 billion more. At some point, all this extra cash has to lead to inflation. Identifying that point in advance is very tricky, because the Fed operates at a serious time lag. From the time you create the money to the time the inflation shows up is usually from nine to 12 months.
Those of us who defend the Fed action might reply that, one, the inflation threat seems awfully remote and two, in the current context, inflation would not be an altogether bad thing. That’s partly because people who owe money on their houses would find their debts less burdensome as inflation cut the real value of that debt.
On the other hand, those of us who defend the Fed must also admit: We might well be wrong. We should listen respectfully to alternative proposals to accelerate economic growth and reduce unemployment. Accordingly, reporters for my website called some of the letter signatories to ask: What would you do instead?
You can read the full range of answers here. But here is a basic summary:
1) Renew the Bush tax cuts.
2) Spend more on infrastructure.
3) Proceed quickly to balance the budget.
Pretty obviously, idea No. 3 contradicts ideas one and two. So let's break them into two groups, taking up No. 3 first, then one and two. The third idea raises some fascinating intellectual challenges. Let's suppose it were true that a rapid move to budget balance was the right answer. What would such a policy look like in the real world?
First, it would mean living with very high unemployment for a long, long time. “Rapid” in the world of federal budget-making is not “rapid" in terms of individual human lives. Getting to a balanced budget within three to five years would be a heroic achievement that would require at least three radical policy changes: ending the wars in Iraq and Afghanistan, reducing Medicare benefits, and raising taxes.
Second, it would mean suspending normal politics. Notice that each of the three necessary radical policy changes is radically unacceptable to important constituencies within the Republican Party which, as the majority party in the House of Representatives, would have to do most of the budget writing.
The proposal to balance the budget is the most intriguing. To believe that rapid budget-balancing is the answer to our economic troubles implies a belief that big federal budget deficits are the cause of those problems. But big budget deficits arrived after the economy went into shock and after most of the 8 million job losses were suffered. What you have to believe, in answer No. 3, is that the employment crisis of October 2008 to January 2009 was caused by the budget shortfalls of January 2009 through November 2010. That's a hard idea to absorb.
Oh, there's another challenge: To believe in rapid budget balancing as a solution to severe deflationary recession, you have to believe that heaping new taxes on the economy while subtracting government demand won’t hurt growth. To believe that, you have to repudiate almost all modern economists, not only John Maynard Keynes, but also Milton Friedman.
So let's take a look at the more practical alternatives, the combination of ideas No. 1 and No. 2.
These amount basically to a reprise of the Obama fiscal stimulus plan, but with a different shape. They imply that the right answer to a crisis is to boost aggregate demand — but to focus on different pieces of demand: government spending on bridges and tunnels rather than on education and health care, tax relief for upper-income savers and investors rather than lower-income spenders.
These are not outlandish preferences. Frankly, I share them. But again: They are very, very slow-moving. Lower taxes on saving and investment support long-term growth. Major infrastructure projects have timelines measured in half-decades. Neither offers much hope to a 55-year-old who lost her job 15 months ago and faces foreclosure at Christmas.
I support quantitative easing, but I recognize that we supporters of the Bernanke plan may be guilty of committing the old Washington syllogism: "We must do something. This is something. Let's do this."
But surely that syllogism is an improvement over what the opponents of quantitative easing seem to be saying:"We must do something. We ain't got nothing. So nothing it is."