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Drinking the Austrian Kool-Aid

Greg Ip of the Economist writes in today’s Washington Post that the Republican presidential candidates have rejected earlier Republican orthodoxy and have embraced some crazy economic ideas (Mises and Hayek, for example). The piece opens with how much John McCain 12 years ago appreciated Alan Greenspan:

When John McCain was running for the Republican presidential nomination nearly 12 years ago, he declared that Alan Greenspan was so critical to the economy that, if the then-Federal Reserve chairman died, he’d put sunglasses on the body, prop him up and hope no one noticed.

Yes, the Republican Party used to think more of the chair of the Fed than it does now. That seems pretty reasonable. A lot of sensible people think Greenspan helped create the housing bubble and the crisis by his interest policies of the early 2000s. Ip continues:

It’s safe to say that GOP opinions of the Fed have slipped a bit since. Texas Gov. Rick Perry, a newly declared candidate for president, said it would be “treasonous” for Greenspan’s successor, Ben Bernanke, to “print more money between now and the election” in an effort to boost the economy. Other candidates have been equally damning if slightly less extreme in their statements. Rep. Michele Bachmann of Minnesota has accused the Fed of “debasing the currency,” while Rep. Ron Paul of Texas has written a bestseller called “End the Fed.” The party’s economic standard-bearer in the House, Paul Ryan of Wisconsin, repeatedly charges the Fed with “bailing out” what he considers President Obama’s reckless fiscal policy and wants the institution stripped of its mandate to promote employment.

I am not a Republican and don’t think Bachmann or Paul have any chance at the nomination. I think treasonous is an ugly word. But the Fed is out of control. Literally. It is not responsible for its actions in any direct way. When it bailed out the creditors of Bear Stearns it overstepped its bounds. It has decided to pay interest rates on reserves which looks to me like a backdoor bailout of the financial sector. It has purchased a great deal of bad paper from banks and financial institutions which is certainly a bailout. It is non-transparent. I don’t know what they paid for those assets–it is not easy to find out. I also agree with Ryan (as do many but not all economists) that giving the Fed a mandate beyond inflation control is a recipe for disaster.

Ip continues:

If Republicans dislike monetary stimulus, they loathe its fiscal cousin even more, routinely labeling Obama’s stimulus as ineffective, or worse, counterproductive. They want balanced budgets, the sooner the better. Bachmann, for instance, has advocated an immediate 40 percent cut to federal spending by barring any increase in the debt ceiling. This, too, is at odds with the party’s earlier views. The administration of George W. Bush sold its 2001 and 2003 tax cuts as Keynesian-style economic stimulus. Lawrence Lindsey, a top Bush adviser, even likened opponents of the tax cuts to President Herbert Hoover, whose obsession with balancing the budget in 1932 worsened the Great Depression.

Well, yes, George Bush justified his tax cuts in Keynesian terms, particularly the 2008 cuts that Ip forgot to mention. The 2008 cuts accomplished nothing. They were simply rebates, something Keynesians think are effective. The 2001 and 2003 cuts were at least cuts in rates that could have incentive effects that would be characterized as “supply-side.”

Ip continues:

Certainly, some of this rhetoric is just political opportunism. The Fed and the stimulus package are handy proxies for Republicans’ real target, which is Obama in the 2012 election. But something more fundamental is going on: The economic ideology of the Republican Party has changed in recent years in an important and little-appreciated direction. Liberals and conservatives in the United States have long differed on how much the government should meddle in individual markets, whether for energy or health care. But they have largely agreed that the government should have at least some role in smoothing out the ups and downs of the business cycle — what economists call “macroeconomic stabilization,” that is, containing inflation in good times and boosting employment in bad.

But this is the consensus that many Republicans in effect now reject.

Yes, fair enough. But why have the Republican candidates rejected this view? The answer IS political opportunism, but not the kind Ip has in mind. The American people see unemployment over 9%. They see that there has been virtually no net job growth over the last two years. At the same time, the deficit has swollen, the US credit rating has been downgraded and we’re on the verge of a double dip. Certainly it is plausible to entertain the possibility that we don’t have the knowledge to steer the economy.

Ip goes on to give a stylized history of macroeconomic policy which I don’t agree with but you can read it yourself if you’re interested. He ignores the importance of Friedman’s (and Schwartz’s) assault on Keynesianism and blames the Republican candidate’s current views on a love affair with Mises and Hayek.

The real flaw in Ip’s argument is the dog that doesn’t bark. Why aren’t the President and the Senate pushing an activist agenda with the economy still struggling? Why isn’t anyone listening to Krugman and others who want even more government spending with borrowed money? Is it those crazy Tea Party-influenced Republicans who like The Road to Serfdom who are the barrier to old-fashioned mainstream economic policy? Well there are about 85 of those, maybe. That leaves 350 members of Congress and a Democratic Senate to craft some “sensible” stimulus. Why isn’t it happening? The answer is that Democrats aren’t so eager to swell the deficit further or bless additional quantitative easing. They want to keep their jobs. And they are as skeptical of Keynesian magic as the out-of-the mainstream Republican candidates.