No Swagger in Reserve

In his first week on the presidential campaign trail, Governor Rick Perry of Texas discovered the answer to a question that's long puzzled me: How do you get mainstream political reporters to care about monetary policy and central banking? All it takes, it turns out, is the threat of a little violence. "If this guy prints more money between now and the election," he told an Iowan who asked a question about Ben Bernanke, "I dunno what y'all would do to him in Iowa, but we would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost treasonous in my opinion."

The remarks set off something of a firestorm of criticism, and everyone from the White House to Karl Rove slammed them as inappropriate. Washington Post "Fix" blogger Chris Cillizza, conversely, analyzed Perry's subsequent refusal to back down in terms of an effective "no apologies" political style that's served the Texas governor well in the past. Perry's style and tone, however, are the least of the issues here. We ought to take Perry seriously on substance. He's wrong to say it would be a bad idea.

When Perry objects to printing money "to play politics," he reveals the root of his objection. The truth is that Perry and other Republicans fear printing money for exactly the reason we ought to do it -- looser money would boost growth and curb unemployment. After all, if it truly harmed the economy, it would only make things worse for an Obama administration that's struggling to keep its head above water amid 9 percent unemployment.

To understand how and why, start with the point that printing money, though it can be made to sound scary, is what central banks do all the time. People use dollars to conduct their economic affairs, and over time, the quantity of economic activity grows. Consequently, the total supply of dollars is pretty much steadily growing (even during the tenure of Saint Ronald Reagan) no matter what. But monetary policy does at times get "looser" (more money) or "tighter" (less money) according to what the Fed's Open Market Committee thinks will be best for the economy.

During normal times, the way this works is that the Fed targets short-term interest rates. If it wants to bring the rates down, it prints money and uses the new money to buy bonds. Lower interest rates boost a depressed economy by making it cheaper to buy a new house (or refinance your existing one) or get a small business loan. They raise stock prices by making bonds look less attractive and thus make it easier for companies to raise equity to finance expansions. Higher interest rates fight inflation by doing the reverse of all those things to relieve shortages of labor or other commodities. (If the Fed wants rates to go up, it sells bonds, thus sucking the money out of the economy.)

Since the recession, the Fed has used these tools to keep short-term interest rates near zero, but the measure hasn't spurred growth the way policy-makers hoped it would. The Fed has used much more controversial rounds of quantitative easing since rates hit zero. The Fed buys longer-dated bonds, pumping extra money into the banking system. In the future, it may sell them back and suck the money out. These unconventional operations - the Fed doesn't usually use these tools, though they're always in its arsenal -- have become controversial, especially in conservative circles and to an extent even among Open Market Committee members, and presumably were what Perry meant to denounce as treasonous.

If you've been looking around, you've probably noticed that the United States is not currently suffering from widespread shortages of able-bodied workers and other production inputs. On the contrary, we have sky-high unemployment. We also have lots of vacant retail storefronts and office space. We have idling factories. We have construction equipment lying around unused. We would benefit, in other words, from just the sort of monetary boost that Perry fears would give Obama's re-election effort a shot in the arm. It's true that lingering economic malaise has been horrible for the president's public standing and, notwithstanding his continued lead in generic balloting, poses a clear and present danger to his bid for a second term. Conservatives are desperate to have voters believe that only a wholesale return to Bush-era policies of tax cuts and deregulation can solve the problem. The truth, however, is that enormous improvements could be made with more aggressive Federal Reserve action. And Perry, for all his flaws, is smart enough to recognize it.

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