Senator Rand Paul (R-Ky.) has kicked up quite a storm with an interview he did with me for Bloomberg Businessweek’s “Interview Issue” (on sale at newsstands now!). At issue are Paul’s views on—and grasp of—monetary policy, based on this exchange:
Who would your ideal Fed chairman be?
[Friedrich] Hayek would be good, but he’s deceased.
Nondead Fed chairman.
[Milton] Friedman would probably be pretty good, too, and he’s not an Austrian, but he would be better than what we have.
Yeah. Let’s just go with dead, because then you probably really wouldn’t have much of a functioning Federal Reserve.
What’s the problem? In a nutshell, Paul is an avowed devotee of the Austrian School of economics and objects to the Federal Reserve’s printing money to help the economy recover from recession. (In this 2010 profile of Ron Paul, Rand’s dad, I lay out the Austrian response—nonresponse, actually—to the 2008 financial crisis and explain how the views of hard-money types like the Pauls differ from those of most mainstream economists.)
As Paul Krugman gleefully noted over the weekend, and again in today’s New York Times, and then again on his blog just now, there is a pretty glaring inconsistency in invoking Hayek, an Austrian, as one’s ideal Fed chairman, and then, in the next breath, invoking Friedman. That’s because Friedman favored the kind of easy-money policies the Pauls abhor and in fact explicitly advocated that the government buy bonds (“quantitative easing”) to respond to the type of recession that the U.S. has been contending with for the past five years.
This isn’t merely liberal spin, as Rand Paul seems to suggest in a rebuttal on National Review’s website today. Conservatives such as James Pethokoukis at the American Enterprise Institute and Patrick Brennan at National Review essentially made the same point Krugman did.
In Friedman’s case, he was talking about the stagnant Japanese economy of 2000, but his point is unmistakable. Pethokoukis digs up this interview Friedman gave to the economist David Laidler in 2000:
David Laidler: Many commentators are claiming that, in Japan, with short interest rates essentially at zero, monetary policy is as expansionary as it can get but has had no stimulative effect on the economy. Do you have a view on this issue?
Milton Friedman: Yes, indeed. As far as Japan is concerned, the situation is very clear. And it’s a good example. I’m glad you brought it up, because it shows how unreliable interest rates can be as an indicator of appropriate monetary policy.
… In 1989, the Bank of Japan stepped on the brakes very hard and brought money supply down to negative rates for a while. The stock market broke. The economy went into a recession, and it’s been in a state of quasi-recession ever since. Monetary growth has been too low.
Now the Bank of Japan’s argument is, “Oh well, we’ve got the interest rate down to zero; what more can we do?” It’s very simple. They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high-powered money starts getting the economy in an expansion. What Japan needs is a more expansive domestic monetary policy.
To me, all of this raises an interesting question that I haven’t seen addressed in any of the various responses to the original Rand Paul interview: If Rand Paul is elected president, who would he nominate to lead the Fed, since, as we eventually established in our original Q&A, both Hayek and Friedman are inconveniently dead?
I can think of only one person who I’m certain shares Paul’s views on monetary policy, is currently alive, and just so happens to have a good deal of free time these days—although I suspect the market’s reaction to his nomination might necessitate a few more rounds of quantitative easing: his dad.