"Republicans, Democrats, the Fed and QE2"

Jeff Frankel says conservative economists should learn "some insufficiently understood history" before expressing worries about Democrats and monetary policy:

The Pot Again Calls the Kettle Red: Republicans, Democrats, the Fed and QE2, by Jeff Frankel : Some conservatives are attacking current monetary policy as being too expansionary, as likely to lead to excessive inflation and debauchment of the currency. The Weekly Standard is promoting a critical letter to Fed Chairman Ben Bernanke signed by a list of conservatives, most of whom are well-known Republican economists. Apparently they are taking out newspaper ads tomorrow. If the National Journal and Wall Street Journal are right that the Republicans are trying to stake out a position that Democrats are pursuing inflationary monetary policy, they are on very shaky ground.

I will leave it to others to make the most important point, how low is the risk of excessive inflation now compared to the risk of alarming Japan-style deflation, with the economy having only begun to recover from its nadir of early 2009. Or to acknowledge that QE2 — the Fed’s new round of monetary easing — is only a second best policy response to high unemployment. (Fiscal policy would be much more likely to succeed at this task, if it were not for the constraints in Congress.)

I will, rather, respond to the partisan content of the National Journal’s question by pointing out some insufficiently understood history:

1. Republican President Nixon successfully pushed Fed Chairman Arthur Burns into an excessively easy monetary policy in the early 1970s — leading to high inflation which the White House tried to address with wage-price controls. Nixon, of course, also devalued the dollar, and took it off gold, thereby ending the Bretton Woods system.
2. Republican Presidents Ronald Reagan and George H.W. Bush repeatedly tried to push Fed Chairmen Paul Volcker and Alan Greenspan into easier monetary policy. This is documented in Bob Woodward’s 2000 book Maestro. The White House succeeded in making life unpleasant enough for inflation-slayer Volcker that he eventually asked not to be reappointed, prompting James Baker to exult “We got the son of a bitch!” (p.24).
3. Democratic Presidents Jimmy Carter and Bill Clinton are the two presidents who have refrained from pushing their Fed Chairmen (Volcker and Greenspan, respectively) into easier monetary policy.
4. Under Republican President G.W.Bush, monetary policy once again became excessively easy, during 2003-06, contributing substantially to the housing bubble and subsequent crash.

...Perhaps such accusations will strike some who don’t pay close attention as superficially plausible, even after all these years. But they nonetheless fly in the face of history. Another case of the pot calling the kettle “red.” Yes, I know, the usual saying is about the color black. But red is the color of deficits, overheating, … and Republicans.

I document this history in “Responding to Crises,” Cato Journal 27, 2007.