A key job of the president is to choose the chair and other key officials of the Federal Reserve’s Open Market Committee. The Fed is way more powerful than most people realize: If the Fed raises interest rates at the wrong time, it can trigger a recession that can destroy a president’s career. (George H.W. Bush blamed his 1992 loss on Fed Chair Alan Greenspan, for example.)
Since 2008, there’s been an important debate about whether the Fed has been doing too much or too little to support the economy. Many economists believe that the Fed’s quick action in late 2008 saved the country from a more severe economic downturn. But critics, including many conservatives, argue that low interest rates between 2008 and 2015 have been counterproductive.
Personally, I think the loose-money side of the debate is right — we’re lucky the Fed took decisive action in 2008, and it probably should have done even more. And this is a lot more than an academic debate, because the Fed is going to face the same choice during the next economic downturn. If the Fed does too little to support the economy, it could make the next recession a lot more severe than it needs to be.
As often happens, Donald Trump has had conflicting views on the topic. Back in November, he argued that "Janet Yellen should have raised the rates" — a tight-money policy that could cause the economy to slow down. Then in May, Trump took a seemingly contradictory position, saying that Yellen "is a low interest rate person, she’s always been a low-interest-rate person, and let’s be honest, I’m a low-interest-rate person."
But while Trump’s views on monetary policy are vague and seemingly contradictory, his running mate Gov. Mike Pence’s views are clear and — for fans of monetary stimulus — rather ominous.
Pence believes in "sound" — that is, tight — money
"During 2008 and 2009, the Fed pushed well over $1 trillion into the financial system in an attempt to rein in unemployment through more government stimulus," Pence argued in a November 2010 speech. "Yet the national jobless rate has been well above 9 percent for a record-tying 18 straight months."
"Printing money is no substitute for sound fiscal policy. The Fed can print more money, but it can’t print jobs."
Right now, the Fed has a mandate to boost employment while also keeping inflation under control. In his 2010 speech, Pence called on Congress to drop the employment half of the Fed’s mandate. That, presumably, would mean that the Fed would do less to contain the next recession, which could lead to greater job losses.
At the time, many conservative commentators were warning that the Fed’s easy money policies would bring about high inflation rates. Instead, the opposite occurred: Inflation rates have been below the Fed’s 2 percent target for most of the past eight years. That suggests that the Fed’s efforts to boost the economy were not as costly as Pence feared at the time.
In the same speech, Pence also flirted with returning to the gold standard. "The time has come to have a debate over gold and the proper role it should play in our nation’s monetary affairs," he said. Many economists believe the gold standard played a central role in worsening the Great Depression. Even free-market economist Milton Friedman argued that a return to the gold standard would be a mistake.
Monetary policy is becoming an area of debate on the political right
In his 2010 speech, Pence was echoing what had become the orthodox conservative line. Ever since Fed Chair Paul Volcker brought inflation under control during the administrations of Jimmy Carter and Ronald Reagan, hawkishness against inflation has been a standard conservative position.
But in the wake of the 2008 financial crisis, this position has become more contested.
Hawks kept predicting inflation, and it kept not happening. So some conservative and libertarian thinkers began to rethink the hawkish position on monetary policy. Ramesh Ponnuru, a prominent conservative writer, was one of the first conservatives to argue that money had been too tight in the wake of the 2008 crisis.
His frequent co-author on monetary topics, economist David Beckworth, was recently hired by the libertarian Mercatus Center to write about monetary policy, where he joined economist Scott Sumner, another early advocate of the view that money was too tight in 2008. James Pethokoukis, an economist at the conservative American Enterprise Institute, has made similar arguments.
But while this point of view is gaining support among right-leaning intellectuals, it’s not clear how much traction it has among rank-and-file Republican voters. Many Republicans are old enough to remember the high inflation of the 1970s. And despite decades of falling inflation, they still believe that vigilance against inflation should be the Fed’s highest priority. Trump’s choice of Pence could help to cement that conventional wisdom among Republican elites for another four years.