One of the most remarkable developments of the past few years has been how the U.S. economy has steadily grown–albeit slower than needed–despite a tightening of fiscal policy. This tightening has been happening since 2010, but kicked into higher gear in 2013. Many observers predicted this fiscal tightening would be disastrous. For example, some claimed the sequester in 2013 would cause anywhere from 500,000 to 700,000 jobs to be lost in 2013. And yet, as noted by Michael Darda, this has not happened because the Fed has successfully offset it:
Non-farm payroll growth surprised to the upside in October (rising 204K vs. expectations of 120K), but the data simply have returned to the 12-month average, in line with the message of a host of leading labor market indicators. The key take-away from the data so far for 2013 is that the Fed, unlike the ECB, has offset the sharpest fiscal consolidation since the 1950s, despite the zero lower bound (ZLB) on short rates and a widespread (but false) view that QE only lifts asset prices and not the real economy. Year-to-year trends in aggregate hours worked and nominal wage rates have been moderate but steady, reinforcing the argument that the Fed has thus far offset any demand side fallout from the sequester and 2013 tax hikes.
This story is a big deal, one that the GOP and other conservatives should be pushing every day in the media. They should be taking the offense and heralding its implications: U.S. government budget deficits can be easily shrunk, even at the ZLB, if we have offsetting actions by the Fed. They could note how this strategy worked before in Canada and the UK. More generally, they could make the point that if you want to minimize federal government interventions into the economy, have the Fed do its job. Just imagine how different the 1930s and the past five years would have been had the Fed stabilized total current dollar spending during these times. This is such low hanging fruit for the GOP.
Instead of running with it, however, the GOP and its thought leaders instead have fretted for five years over an inflation threat that has not materialized and now worry over asset bubbles that one has to strain to see amidst a depressed economy. This recent George Will column is a great example of this myopic vision of money. Instead of seeing how the Fed has offset fiscal austerity and therefore could stave off more if further budget cuts were made, George Will instead focuses on unfounded fears of loose monetary policy. This is why folks like Jim Pethokoukis are pulling their hair out.
The GOP needs a serious rethink on monetary policy. Some of us on the right have been trying for the past few years to awaken the GOP to this golden opportunity. We write op-eds, articles, and even travel to Capitol Hill. But sadly, the GOP continues to sabotage itself on monetary policy. It pushes for hard money policies that weaken the economy and, in turn, open door for other policies they detest. Imagine if the Fed had not allowed the sharp collapse in aggregate demand in late 2008, early 2009. It is less likely that many of President Obama’s policies would have been supported and therefore enacted. As Scott Sumner once said, monetary policy is the Achilles Heel of the right.
This would be almost comical if it were not so serious. So come on GOP, run with the amazing story of fiscal austerity since 2010 and steady growth nonetheless. Do not waste this golden opportunity.