It used to be that whenever unemployment was high, Congress would push the Federal Reserve to do more.
But that, Binyamin Appelbaum points out, isn't the world we live in anymore. Instead, for the last seven years, the Congressional GOP has tried to stop the Fed from keeping interest rates low or buying bonds with newly-printed money. It's a strange role reversal. The whole idea behind central bank independence, after all, is that politicians can't be trusted to manage the money supply, since they'd always try to goose the economy in the short-term—when they face re-election—without paying any attention to the inflationary consequences in the longer-term. What we have now, though, is a political party that says it's the central bank that can't be trusted, since it isn't worried about theoretical inflation like they are. What's going on?
It's worth stepping back and reminding ourselves how unusual this is. Until now, it's always been Congress that's said the Fed should do more to fight recessions, not the other way around. Sometimes the politicians have been right; most of the time they haven't. The one time they were, though, was in 1932, when the House of Representatives debated the Goldsborough Billthat would have required the Fed to buy bonds until prices were back up to where they'd been in 1926. The idea, which Congress somehow understood better than the Fed, was that falling prices had made the Great Depression worse, so rising prices would make it better. So to head this off, the Fed started buying bonds on its own—what we'd call quantitative easing today—but then stopped, even though it was working a little, once Congress was out of session. It was the same story 50 years later when Congress once again tried to browbeat the Fed into easing policy. Well, except for the fact that this time the Fed was right to resist. Fed Chair Paul Volcker had engineered the deepest recession since the 1930s in a bid to finally whip inflation, and Congress thought he'd gone too far—enough that they called on him to resign. He didn't, the slump went on, and inflation came down.
All of that's backwards now. It's the Fed that thinks it can and should do more to bring down unemployment, and the Republican Congress that says it shouldn't. In fact, back in 2011, the Republicans took the unprecedented step of sending the Fed a letter warning it off against further stimulus. They've also tried to make the Fed set policy according to a much more restrictive mathematical rule. Or have the Government Accountability Office "audit"—really, second guess—its decisions to try to intimidate it into doing less. And at a time of high unemployment, Republicans have even tried to force the Fed to ignore it and focus only on inflation.
Part of this is just bad economics. Republicans thought bigger deficits would mean higher borrowing costs, and when that didn't happen they blamed the Fed. Now it's true that quantitative easing did lower interest rates, but it didn't lower them that much to make a major difference for U.S. borrowing. And besides, if the Fed had pushed rates lower than they "should" have been, there would have been a lot of inflation. There's barely any now. But that hasn't stopped Republicans like Paul Ryan from claimingthat the Fed's bond-buying "looks an awful lot like an attempt to bail out fiscal policy." In other words, Republicans think the Fed has enabled Obama's big government agenda by stopping the debt crisis they knew, just knew, was coming from, well, actually coming.
Another part is inequality. The rich have gotten so much richer the past 30 years that they have more to lose from inflation. Now, I know, that doesn't make a lot of sense when the Fed's bond-buying has pushed stock prices up so much, but there a couple things to remember. First, people are loss averse. They hate losing what they have more than they enjoy getting more of it. And, strange as it seems, there are a lot of rich people who think they really could get wiped out if the Fed's unconventional policies don't just take us back to 1970s America, but to 1920s Germany—with, as Paul Ryan puts it, the "debasement of the currency." Second, people are risk averse too. If they can make money without really having to risk it, well, that's what they want to do. The Fed's low interest rate policy has made that harder, though, which is why so many conservatives have attacked the Fed for things worse for well-off people—and they are well off—who were counting on having more interest income.
The last part is the way Republicans Reaganize everything. Basically, they often seem to think they should do what he did no matter how much the world has changed since 1980. So they say inflation is one of our biggest problems because Reagan did. Indeed, Paul Ryan wanted to make the Fedstop paying attention to unemployment even before Obama was in office or there was any QE. And that's why Ryan and conservative economists likeMarty Feldstein were worried that inflation would be too high years from now when it was actually too low right now. It's hard to understand 2015 if you think it's always 1979.
All this makes sense if you think about the last time a political party was this opposed to monetary stimulus: the Republicans between the 1890s and 1930s. Back then, there was just as much inequality as there is now, and Republicans thought of the gold standard the way they think about Reagan today. In other words, the Republican Party's interests often reflected that of the wealthy, who thought the only thing we had to fear was, well, inflation. It's no surprise, then, that the election with the most campaign spending on record, as a percent of the size of the economy, came in 1896, when William Jennings Bryan terrified Wall Street with his call to "stop crucifying mankind on a cross of gold" and use silver as money too.
On the issue of monetary policy, this isn't your father's Republican Party. It's your great-grandfather's.
Matt O'Brien is a reporter for Wonkblog covering economic affairs. He was previously a senior associate editor at The Atlantic.
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