On November 15th, the New York based think tank e21 released an “Open Letter to Ben Bernanke” criticizing the Federal Reserve’s intention of engaging in a policy of quantitative easing by purchasing $600 billion worth of U.S. government securities. While the letter argued against the policy, it did not vocalize alternative solutions, except arguing that “improvements in tax, spending and regulatory policies must take precedence in a national growth program.”
While Sarah Palin was among the earliest critics of the policy, the e21 letter has shown that this level of concern is present among some conservative economists as well. FrumForum has been contacting the co-signers of the letter to find out what policies they would propose instead of monetary expansion to deal with the economic situation. The majority of responses have focused on fiscal solutions that are ultimately political in nature. The current responses also do not show a consensus on monetary policy.
Douglas Holtz-Eakin, President of the American Action Forum, told FrumForum that quantitative easing will not reduce unemployment or inflation, and so fails the test of meeting the Fed’s dual mandate. He argued instead for a “pro-growth fiscal policy”, endorsing the tax reforms of the Bowles-Simpson deficit commission, and arguing that big out year deficits be taken “off the table”. He suggested that the increase in Republicans in the House could make these policies “politically feasible.”
In an email to FrumForum, Nicole Gelinas of the Manhattan Institute argued against the Fed taking action to help the economy, “The Fed should not try to be heroic in the absence of functional politics (on both sides).”
Speaking for herself, Gelinas called for solutions that bypassed the monetary policy apparatus. She called for regulators to “do their jobs when it comes to making sure that financial institutions are operating prudently and soundly” with a focus on getting foreclosures on defaulted homes. She criticized the 2009 stimulus for sending money to state governments without requesting them to cut their budgets, and called for “real financial rules and regulations” that could provide “consistent market discipline” to the financial sectors, citing previous pieces she had written on the topic.
She argued that this would deal directly with unemployment:
Get rid of the bad debt, allow house prices to hit bottom, help harness future state and local government liabilities, invest in infrastructure, and create some semblance of market disciple for the financial industry, and you’re on your way to an end to the unemployment crisis.
Gregory Hess of Claremont McKenna College struck a similar stance that fiscal policy was the primary driver of the economic downturn, and that there was no role for monetary stimulus, “QE2 by the Federal Reserve will likely cause volatility in long term asset markets.”
His focus returned to the similar fiscal notes that Holtz-Eakin took, targeting the increase in government and the tax code:
The reasons that banks do not want to lend and firms are hesitant to expand their activities is because of the rising size of government (which portends higher tax rates), the expiration of the tax cuts under President Bush, and the lingering air of economic uncertainty. These all inhibit growth.
Hess gave no direct comment on the issue of unemployment.
On the topic of interest rates, two of the co-signers that FrumForum contacted provided two different answers.
Charles W. Calomiris of the Columbia University Graduate School of Business told FrumForum in an email that he favored keeping interest rates were they currently were:
There are many reasonable alternative views on how to target monetary policy. I favor Ben McCallum’s proposal to target nominal GDP growth at about 5%. Since we were on track with that target before QE II, at least for the moment, I would neither be raising or lowering interest rates.
Though he also stated that he would be in favor of a looser monetary policy if the evidence could convince him the circumstances warranted it:
If there were evidence of a need for further loosening to raise the growth of nominal GDP to that target rate, then some quantitative easing might be a reasonable proposal.
In contrast, Ronald I. McKinnon of Stanford University argued for a gradual increase of short-term interest rates, to reduce the threat of inflation in the long run. His concern was that the current regime promoted “a flood of hot money” into markets in Asia and Latin America.
In a piece on e21’s site, David Malpass argues that the crux of the debate is that quantitative easing represents an expansion of “big government”:
[U]nless Fed asset purchases are in some way necessary to the economy’s survival, the assumed harm from an expansion of government, which is at the core of our principles of limited government, argue against Fed asset purchases.
FrumForum is still contacting the other letters cosigners and waiting for them to weigh in on what they believe should be undertaken to improve the economy if indeed the purchase of $600 billion treasury bonds threatens the core principles of limited government.
Shawn F. Summers contributed to this piece.