I’m uncomfortably aware that critiquing the Wall Street Journal’s editorial column is a job reserved for himself by The New Republic’s Jonathan Chait – and that Chait does not take kindly to interlopers on his territory. But it’s August, and Chait is taking a partial holiday, no doubt on Martha’s Vineyard with his fellow out-of-touch elitists.
And in Chait’s absence, the Journal has launched an attack on Ben Bernanke and the Federal Reserve that is not only remarkable in its brutal mishandling of fact – but also for its possibly lethal intellectual consequences within the conservative world.
Precisely because conservatives (rightly) hesitate to use aggressive fiscal policy to fight recessions, it is all the more urgent that we appreciate the reach of monetary policy. If we are pushed by ignorance or passion into a wrongheaded monetary policy, then we will have no answer whatsoever to the question: how do we create prosperity and employment in the near term?
So let’s go line by line through the Journal’s misinformation:
All the world’s right-thinkers are denouncing Rick Perry for suggesting this week that Texans would get “pretty ugly” with Federal Reserve Chairman Ben Bernanke if he guns the money supply any more between now and the 2012 election. His poor choice of words aside, the Texas Governor is right to put monetary policy front and center in the 2012 Presidential debate.
Let’s stipulate that Mr. Perry, in his first week on the Presidential stump, was wrong to use the words “almost treacherous, treasonous” in referring to Mr. Bernanke. Both of those words ought to be reserved for specific acts of betrayal against America, and the Fed chief is certainly a patriot. In particular, “treason” is the only crime specifically defined in the Constitution, which is something a tea party politician ought to learn.
On the other hand, everybody knows Mr. Perry meant no literal harm and was indulging the irrational exuberance that is one of his trademarks. The faux-outrage from liberals who routinely refer to the tea party as “terrorists” shouldn’t be taken seriously.
The real news isn’t the rhetorical gaffe but the substance and politics of Mr. Perry’s demarche. Here we have a Presidential candidate, a Texas populist no less, laying out a position in favor of sound money. This is a bear walking on its hind legs. The ghosts of Wright Patman and Henry B. Gonzalez are howling in the Hill Country.
This is all good partisan fun, but it does raise an interesting question: In what sense is Rick Perry a “populist”? As Andrew Gelman has exhaustively and I think decisively demonstrated, Texas Republicans are elected with the votes of the state’s richest people, not its poorest. Over the course of his political career, Rick Perry has raised a reputed $100 million. As for his presidential campaign …
Dozens of wealthy Texans who have been Perry’s top patrons in the state’s freewheeling, unregulated campaign finance landscape are being hit up for large checks by Super PACs supporting the governor. Simultaneously, many wealthy Perry backers and new prospects are being tapped by his campaign to help bundle scores of $2,500 donations, the legal limit per person.
The Republican governor is being backed by at least six Super PACs. The key group, called Make Us Great Again, has the closest ties to Perry and is expected to be a multimillion-dollar operation that will run ads to back him. It was set up this month by Mike Toomey, an Austin lobbyist and an ex Perry chief of staff. It will also benefit from the fundraising muscle of G. Brint Ryan, the CEO of a Dallas tax firm who with his wife has donated $563,000 since 2001 to Perry’s campaigns.
“I’d presume that the way for fellow travelers to compensate for a late start is to raise big money fast for a Super PAC. Mike and Brint have a wide range of contacts,” Austin-based lobbyist Bill Miller told iWatch News . His firm HillCo’s PAC contributed more than $253,000 to Perry’s earlier campaigns.
Other pro-Perry PACs are also revving up, including Americans for Rick Perry, which received a check for $100,000 from billionaire investor Harold Simmons and is run by Bob Schuman, a California based GOP operative. Schuman said he informed Toomey that “we’re going to stay out of his way in competing for Texas funds,” but adds that he still expects to raise $1.8 million by year’s end for grassroots and social media campaign to back Perry. Schuman says the PAC has already raised $400,000 and will likely launch a drive in Florida where a straw poll will be held in late September.
Back to the Journal editorial:
The media trope of the week is that Mr. Perry is George W. Bush only more so, but he clearly isn’t the same on monetary policy. Mr. Bush, who first appointed Mr. Bernanke, was an easy-money, weak-dollar President. He and his former economic advisers still don’t understand how Alan Greenspan’s policies at the Fed contributed to the credit and housing manias that led to the financial meltdown that caused the GOP’s political undoing in 2008.
So here’s the St. Louis Fed’s calculation of the monetary base through the Volcker and Greenspan years.
Do you see a dramatic departure from the historic norm between 2002 and 2007? I sure don’t. So what’s the Journal talking about?
Mr. Perry seems to appreciate that the Federal Reserve can’t conjure prosperity from the monetary printing presses. His articulation needs some work, but we hope the Texan doesn’t let media and other criticism deter him from pursuing the argument. The issue is crucial to understanding—and explaining to the American public—how the meltdown happened and why Americans are so unhappy with the current recovery.
Nobody – literally nobody – suggests that prosperity can be conjured from printing presses. The question before us is: what to do in the face of the worst economic collapse since the 1930s? Of course long-term growth comes from savings, innovation, and raising society’s skill level. (The Journal, with its indifference to deficits and its advocacy of open borders, is on the wrong side of at least two of those issues.) But when a crisis comes, what do you do then? In 1934 as in 2009, an accommodating monetary policy can mitigate the crisis and open the way for the drivers of longer-term growth to resume operation. Milton Friedman got that two generations ago. Almost every working business economist on the planet gets it today.
It’s in the next paragraph that the Journal editors shift from misdirection to disinformation:
The Texas Governor has a better insight into middle-class economic anxiety than do most Washington-Wall Street elites. Americans intuitively understand that their after-inflation incomes haven’t risen for a decade. Even when incomes rose during the growth years from 2003-2007, the gains were undermined by the rising cost of housing, as well as by rising food and energy prices.
Wow. I mean truly: wow.
Let’s start with sentence 2. I remember when it was fighting words to point out that the median income actually declined between 2000 and 2007. Back then, we were supposed to believe that the Bush tax cuts had let loose a cascade of prosperity across the land. Now – poof! – the Journal has vaulted to exactly the opposite side of the position it vehemently upheld for half a decade.
But even as it flips and flops toward a more accurate statement of the facts, the Journal inserts a series of misleading or worse misstatements.
1) True, incomes rose between 2003 and 2007 – that is, from the beginning to the end of the growth cycle. But the median income never caught up to its inflation-adjusted level of 2000, back before the Bush tax cuts. And many categories of income earners actually saw outright inflation-adjusted decline during the 2003-2007 period: college graduates for example.
2) The suggestion that it was energy prices that were primarily to blame for the stagnating incomes is an especially sneaky move – and sneaky in such a complicated way that unfortunately I’ll need a few lines to decode the sneak.
Here’s the narrative that the Journal hopes to embed in your head with the quoted lines:
Income grew adequately in the 2003-2007 period. But to the extent income did not growth, the fault lies with the monetary authorities. Their reckless money-printing caused the prices of housing and energy to rise, and those price rises negated the rises in cash incomes.
That implied narrative is false in every particular.
As we’ve seen, the monetary authorities did not recklessly create money in the 2000s. (Which is why, d’oh, we saw so little general price inflation in the period.)
The energy price increases we saw had nothing to do with US money creation and everything to do with China’s and India’s dramatic entry into international energy markets. Between 1990 and 2010, the number of cars on Chinese roads grew by 90x. Not 90%. 90 times. China soared over those 20 years from being a net oil exporter to the world’s second-largest oil importer, after the US – and Chinese consumption continues to grow at a pace 7x that of the US. We could scrap the US dollar and substitute gold bars with Ayn Rand’s image on them without changing those energy market facts.
But look, even more to the point: the price of oil has nothing whatsoever to do with the stagnation of US cash incomes. The bad news in the 2000s was bad news about earnings. Whether the price of oil went up, down, or sideways, the typical American worker had less money to spend on everything in 2007 than seven years earlier.
The main depressant of those incomes was a factor unmentioned in the Journal editorial: healthcare costs. Through the 2000s, the cost of labor to employers rose briskly: an average of 25% per hour as I pointed out in my 2007 book, Comeback. But because healthcare costs doubled over the decade, none of that increase in the money paid by employers filtered through to employees.
So why doesn’t the Journal acknowledge that rather large fact?
Two reasons may be at play:
1) Back when the Journal wanted to argue that incomes really had risen handsomely in the Bush years, its favorite trick was to aggregate wages and benefits. That made a nice-looking chart, even if it begged the question: “Am I really better off if my employer has to pay twice as much for knee surgery?” So possibly they have some compunction now treating the rise in healthcare costs as a bug rather than a feature.
2) More plausibly: as improbable as it is to blame the Fed for the surge in oil prices after 2002, it would just utterly flunk the laugh test to try to blame the Fed for the increase in health costs. So down the memory hole with that.
One last thing has to be said about the above paragraph: You just have to admire the audacity of the claim that it is Washington-Wall Street elites who want looser money. There is one teeny-weeny smidgen of truth here: Commercial banks that can borrow from the Fed at virtually 0 and then lend risk-free to the Treasury at 3% and now 2% have earned a tidy profit from the zero interest rate environment. But in many of our imaginations, “Wall Street” means hedge funds and private equity firms just as much as commercial banks. It is these players who have been squawking loudest against the Fed, a trend nicely symbolized by the fact that when the e21 think tank released its famous November 2010 open letter condemning quantitative easing, 7 of the 23 signatories were investors and money managers.
- MORE TO COME -