Hard Money Plus Austerity Equals Disaster

The whole world continues to wait with bated breath to see what happens in the next couple of days to the impasse between European creditors and Greece (the buzz seems to be that the Greeks are in the process of surrendering to austerity demands with some debt-relief concessions, with the opposition of the Greek people to Grexit having fatally undermined Syriza’s bargaining power). But in the mean time, Paul Krugman offers a “lesson learned” about toxic combinations of economic policies that is highly relevant to the choices we face right here in the USA:

[T]here are cases — for example, Canada in the 1990s — of countries that slashed their debt while maintaining growth and reducing unemployment. But if you look at how they managed this, it involved combining fiscal austerity with easy money: Canada in the ’90s drastically reduced interest rates, encouraging private spending, while allowing its currency to depreciate, encouraging exports.

Greece, unfortunately, no longer had its own currency when it was forced into drastic fiscal retrenchment. The result was an economic implosion that ended up making the debt problem even worse. Greece’s formula for disaster, in other words, didn’t just involve austerity; it involved the toxic combination of austerity with hard money.

So who wants to impose that kind of toxic policy mix on America? The answer is, most of the Republican Party.

On one side, just about everyone in the G.O.P. demands that we reduce government spending, especially aid to lower-income families. (They also, of course, want to reduce taxes on the rich — but that wouldn’t do much to boost demand for U.S. products.)

On the other side, leading Republicans like Representative Paul Ryan incessantly attack the Federal Reserve for its efforts to boost the economy, delivering solemn lectures on the evils of “debasing” the dollar — when the main difference between the effects of austerity in Canada and in Greece was precisely that Canada could “debase” its currency, while Greece couldn’t. Oh, and many Republicans hanker for a return to the gold standard, which would effectively put us into a euro-like straitjacket.

That dubious Republican fiscal policies are matched by even more disastrous monetary policies is one of the most under-discussed subjects in American politics. One rare conservative dissenter from the hard-money chorus, Ramesh Ponnuru, argued as far back as 2012 that Ron Paul’s goldbug views seem to be infecting the entire GOP, denying Republicans the tools needed to reconcile fiscal discipline with economic growth. I personally think the problem is less the influence of either of the Pauls than the deep-seated sympathy of so many Republicans with creditor interests, and the corresponding tendency to view even modest efforts to avoid deflation as a temptation to immorality.

No, a Republican president or Congress cannot instantly impose deflationary policies on the Federal Reserve Board. But the next president will be able to appoint a new chairman and vice chairman of the Fed in 2018, and the Senate must confirm all new members (there is currently a vacancy). So the two parties’ views on monetary policy needs some attention in 2016 even as we naturally focus on the more understandable differences on taxes and minimum wage and health care.

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Ed Kilgore

Ed Kilgore, a Monthly contributing editor, is a columnist for the Daily Intelligencer, New York magazine’s politics blog, and the managing editor for the Democratic Strategist.