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Saturday, July 27, 2013

The Political Right's Affection for QE

This (from Paul Krugman) describes my position on QE:

...QE, in the eyes of its most enthusiastic advocates, can return us to Milton’s Eden. And they are determined to read the evidence as confirming that hopeful notion.
Yet there are many economists, myself included, who regard this view as highly unrealistic, yet support more aggressive Fed action all the same. Why? First, because it might help and is unlikely to do harm. Second, because the alternative — fiscal policy — may be of proven effectiveness, but is also completely blocked by politics. So the Fed’s efforts are all we have.

And I think his explanation for why so many conservatives have embraced QE is right on the mark as well:

the affection for QE comes, instead, from the alluring prospect — to some conservatives, at least — of getting economic stabilization without any need for activist government outside the narrow sphere of monetary policy. What he doesn’t say clearly, at least in this piece, is that this was the allure of old-fashioned monetarism too. Just stabilize the money supply, declared Milton Friedman, and we don’t need any of this Keynesian stuff (even though Friedman, when pressured into providing an underlying framework, basically acknowledged that he believed in IS-LM). Why, if only the Fed had stabilized M2, there would have been no Great Depression!

I'd add that conservatives favor a rules-based QE rather than a discretionary QE for the same reason, e.g. just stabilize nominal GDP and all will be well in the world, no need for Fed activism beyond that simple rule.

    Posted by on Saturday, July 27, 2013 at 10:12 AM in Economics, Monetary Policy, Politics | Permalink  Comments (209)



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