Dems Need to Pay Attention to Monetary Policy!

I’m not nearly the first to this party, but want to bring it up for my readers who may not be clued in to it.

For the second year in a row, some of the best economics bloggers on the Web (this year: Matt Yglesias, Mike Konczal, Karl Smith, Lisa Donner), did a session at Netroots Nation on monetary policy, and how the progressive left (including Democratic lawmakers) needs to saddle up and counter the destructive right-wing influence in this area.

Why the Fed is the Most Important Economic Issue You Know Nothing About

This is a big deal. Monetary policy often, even usually, has a far more potent effect on national well-being and the distribution of wealth and income than the fiscal policy that progressives consider to be so important. (At least in the short- to medium term.) Those fiscal issues are important. But ignoring monetary policy is like ignoring coal plants in discussions of global warming.

Lefty idol Paul Krugman has given this example a zillion times: when Volcker opened the monetary taps in ’83 (after clamping down to tame inflation), the economy — and the employment situation — turned around hugely, within months. That was something of a special case, but it imparts the potential power and immediacy of monetary policy compared to many/most fiscal initiatives, which usually take quite a while to play out, and are rarely large enough to be big short-term game-changers.

But in the political realm, Democrats have largely ceded their voices to the ‘Pubs (HT Ryan Cooper) and their inflation hysteria (which survives like a zombie that won’t die, year after year, even while being wrong, year after year):

“I wish you would take QE3 off the table,” said Texas Rep. Kevin Brady, the ranking Republican on the committee. “I wish you would look the markets in the eye and say that the Fed has done too much.” Similarly, Sen. Jim DeMint (R-SC) complained to Bernanke that many of the stimulative measures the Federal Reserve has taken “are giving us a false sense of security.”

By contrast:

The ranking Democrat on the committee, Sen. Bob Casey, merely inquired, in a neutral tone, whether the Federal Reserve was planning to take further action. Bernanke simply replied that the Fed was still contemplating the matter, and a lot depended on whether “there will be enough growth going forward to make material progress on the unemployment rate.” (Fed officials meet on June 19 to discuss their next steps.)

The Fed is supposed to:

1. Provide for both stable prices and full employment.


2. Be politically independent.


1. It has criminally abdicated its responsibility for employment in recent years, while fetishizing its inflation mandate.

2. It is subject to political pressure, as the quotations above make clear.

More proof of #2, from Binyamin Applebaum (HT Matt Yglesias), quoting Eric S. Rosengren, president of the Federal Reserve Bank of Boston:

“We’ve done things that are quite unusual. We’re using tools that we have less experience with,” Mr. Rosengren said. “Most of the criticism has been that we’re being too accommodative. That is a concern that we have to put some weight on.”

It’s time for progressives and congressional Democrats to start exerting some of that pressure. Pay attention, people!

Cross-posted at Asymptosis.