Mitt Romney, Liquidationist
How times have changed. Back in 2004, Greg Mankiw declared, in the Economic Report of the President, that
Aggressive monetary policy can reduce the depth of a recession.
But now, after the Fed has finally moved a bit in the direction of doing something about the Lesser Depression, Mitt Romney – supposedly advised by Mankiw among others – is outraged:
[T]he American economy doesn't need more artificial and ineffective measures. We should be creating wealth, not printing dollars.
That word "artificial" caught my eye, because it's the same word liquidationists used to denounce any efforts to fight the Great Depression with monetary policy. Schumpeter declared that
Any revival which is merely due to artificial stimulus leaves part of the work of depressions undone
Hayek similarly decried any recovery led by the "creation of artificial demand".
Milton Friedman – who thought he had liberated conservatism from this kind of nonsense –must be spinning in his grave.
The Romney/liquidationist view only makes sense if you believe that the problem with our economy lies on the supply side – that workers lack the incentive to work, or are stuck with the wrong skills, or something. And that's just not what the evidence says; instead, it points overwhelmingly to an insufficient overall level of demand.
When dealing with ordinary, garden-variety recessions, we deal with inadequate demand through conventional monetary policy, namely by cutting short-term interest rates. Until recently even Republicans were OK with this.
Now we face a more severe slump, probably driven by deleveraging, in which even a zero rate isn't low enough, so monetary policy has to work in unconventional ways – in particular, by changing expectations about future inflation, so as to reduce real interest rates. This is no more "artificial" than conventional monetary policy – harder, yes, but it's still about trying to get the market rate aligned with the "natural" rate consistent with full employment.
So where are Romney and his party coming from? Basically, they've thrown out 80 years of economic analysis and evidence because it doesn't fit their ideological preconceptions, and they're resorting to dubious metaphors – "sugar high" and all that – as a substitute for clear thinking.
What you really have to wonder about is all the not-stupid economists who have aligned themselves with this guy and that crew. Probably they imagine that once the election is past sensible economics will return. But the odds are that they are wrong, and that they're sacrificing their own credibility to put charlatans and cranks in the driver's seat.
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