Fighting the Fed

Sarah Palin is leading conservatives' most sinister campaign to date.
November 17, 2010 |
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Last week, in between leading a graduate seminar on Proust and delivering a long-scheduled lecture on mass spectrometry, former Alaska Governor Sarah Palin ventured a few ticks beyond her acknowledged area of expertise and reflected on monetary policy at a convention in Phoenix. The occasion for her unexpected soliloquy—I’m actually serious about the economics speech—was the Fed’s decision to buy some $600 billion in long-term government securities, a practice known as quantitative easing. “We shouldn’t be playing around with inflation,” Palin said, in a typically Delphic pronouncement. She helpfully added that “everyone who ever goes out shopping for groceries knows that prices have risen significantly over the past year or so.”

Alas, as if to prove the rule that no nuanced utterance goes unpunished in our 24/7-Internet-cable culture, these reflections promptly landed Palin in a nasty he said/she said spat. The “he” in this case was Wall Street Journal reporter Sudeep Reddy, who promptly observed that food and beverage prices had risen by a meager 0.6 percent through September, the slowest rate since the Labor Department began tracking such data in 1968. In response, the self-described “former governor and current housewife” took to Facebook to flag a recent piece in Reddy’s own publication noting that supermarkets and restaurants were beginning to worry about rising costs. That the very first sentence of the piece conceded the “tamest year of food pricing in nearly two decades” did not appear to deter her.

Over the past two years, as the Fed has come under increasing fire from outraged Tea Party activists, it’s been tempting to impute a principled conservatism to all their fulminating. In surveying last week’s economic developments, for example, Washington Post columnist Steve Pearlstein highlighted the “criticism of the Federal Reserve's plan to pump additional money into the economy” by “Sarah Palin and other hard-money conservatives.”

But the truth is that, while “hard-money conservatives” certainly exist, they have little in common with Palin and her supporters. These conservatives have historically been economic elites, whereas the Palinites have a much more populist bent—“humble folks like me,” as Palin describes her ilk. Still, Pearlstein is right that these two groups have somehow ended up on the same team in their fight against the Fed. How this happened has a lot less to do with economics than with politics, and it should be deeply troubling for the rest of us.

 

Let’s be clear: Even with the help of what was presumably a pricey speechwriting team, Palin’s ignorance of monetary policy is difficult to repress. The recent path of food prices was hardly the only curious claim in her Phoenix speech. There was, for example, her discussion of quantitative easing as though it were sorcery. “And where, you may ask, are we getting the money to pay for all this? We’re printing it out of thin air,” she complained. True-ish. But, as Ben Bernanke explained shortly after the Fed announcement, that’s pretty much how all of monetary policy works. Whenever the Fed wants to lower the standard, short-term interest rate—as it has done repeatedly over the decades—it effectively creates money to buy up short-term Treasury securities. Somehow, Palin never previously felt the need to dwell on this.

Then there’s my favorite passage of the speech, which displayed Palin’s solicitude for European policymaking sensibilities. “The German finance minister called the Fed’s proposals ‘clueless,’” she said. “When Germany, a country that knows a thing or two about the dangers of inflation, warns us to think again, maybe it’s time for Chairman Bernanke to cease and desist.” But the starchy Germans always worry about inflation, even when it’s not remotely a threat. (In the same way, my Jewish mother always worries that I’m starving, but I don’t take that as a reason to gorge myself.) If, on the other hand, Zimbabwe started lecturing us on out-of-control inflation, that might get my attention.

What Palin is after here, of course, isn’t a debate over the finer points of interest-rate setting. It’s just the latest instance of her lashing out against meritocrats and intellectuals, whom she feels talk down to her and her fellow repositories of homespun wisdom. Palin has always practiced a kind of identity politics in which one’s views deserve privileged status by virtue of they’re not being informed by any specialized knowledge. Hers is a politics of resentment—resentment at being led by the sort of snobs who think governing requires expertise. She betrays herself by getting so defensive in her exchange with Reddy, whom she sneeringly labels a “prestigious reporter for The Wall Street Journal”—another pointy-head, in other words.

In this way, Palin is a near-perfect symbol of a certain type of Tea Partier—the people who’ve had enough of the government’s arrogant scheming, even if their worldview falls a bit short of cohering. When The New York Times surveyed Tea Party supporters earlier this year, it conducted follow-up interviews to gauge respondents’ thoughts on Medicare and Social Security. Most resisted cuts to either program. “That’s a conundrum, isn’t it?” a woman named Jodine White told the paper. “I don’t know what to say. … I guess I want smaller government and my Social Security.” Like Palin, White’s opposition to government isn’t logical; it’s visceral.

 

By contrast, there’s another species of Tea Partier that invokes a tightly wrapped logic in its attacks on government. These would be the hard-money conservatives Pearlstein alluded to, of which Ron and Rand Paul are probably the most famous. The Pauls trace most of the country’s problems back to the government’s monopoly on minting money, which it then debases so as to expropriate wealth from its citizens. As Ron Paul has evocatively put it:

An emperor, a king, or a dictator might mint coins with half an ounce of gold and force merchants, under pain of death, to accept them as though they contained one ounce of gold. Each ounce of the king's gold could now be minted into two coins instead of one, so the king now had twice as much “money” to spend on building castles and raising armies.

And, of course, the ultimate symbol of the government’s money-creation power is the Fed. Unlike Palin, the Pauls have long understood that the Fed’s “printing press” is the channel through which it conducts basic monetary policy, not just quantitative easing. (Though the phrasing isn’t literally true: The Fed doesn’t actually print money, it just credits banks with additional reserves.) That’s precisely what they’ve always found so objectionable about the central bank. “[W]e badger the Federal Reserve and the markets say we need more money, so they crank it out,” Ron Paul said in a speech that brought down the house at the Conservative Political Action Conference in February 2008. “You can’t lower interest rates unless you print more money. So they lower interest rates dramatically, like never before!”

The Pauls’ views may be a bit medieval and needlessly cruel—a growing economy requires a growing money supply; relying on gold or silver, as the Pauls propose, would condemn us to periodic deflations and depressions. But they’re nothing if not coherent. And, unlike the Palinites, they embrace ideas (albeit some pretty loopy ones) rather than scorn them. Stumping for his son last winter, Ron Paul announced his hope of leading an “intellectual revolution.” Both Pauls are steeped in the work of the Austrian economist F.A. Hayek; they lean heavily on the Hayekian idea that a small group of central planners (i.e., the Fed), no matter how sophisticated, can’t synthesize the vast amount of knowledge that’s diffused throughout the economy, leading to inefficient (or, worse, corrupt) decisions.

But more than anything else, the Pauls represent the interest of the affluent and educated. After all, the people most worried about the debasement of the currency are the people who, well, have a lot of currency. On the other hand, the working class, who typically have more in the way of debt than assets, actually benefit from inflation, since it eats away at the value of their mortgages and credit card bills. Likewise, when the Pauls rail against Social Security and Medicare, they’re being perfectly true to their class, since the two programs downwardly redistribute income. It’s part of the reason Ron Paul’s presidential campaign took off on college campuses and online, two places where the affluent and educated congregate. (By contrast, unpublished data from this recent Washington Post poll shows that college grads are much more likely than non-college grads to have an unfavorable view of Palin and to believe she’s unqualified to be president.) One of Ron Paul’s most indispensable online activists was an early Google employee who sold his stock at the peak of the market.

 

Throughout American history, the affluent Pauls and the working-class Palinites have been blood enemies. The achievement of the modern conservative movement was to unite them in a general hostility to government—mostly by convincing the latter that government was transferring their tax dollars to undeserving minorities and the poor. But the divide between creditors and debtors on monetary policy had never really been bridged (with the possible exception of the late ’70s, when everyone bemoaned high inflation). The Pauls would rail against debasement of the currency and the Palinites … mostly didn’t care.

Now, the Tea Party is generating a formidable attack on the Fed’s monetary-policy prerogatives by fusing longstanding critics of easy money (the Pauls) with the people who just want to rail against elites. If you look, for example, at the Times poll of Tea Partiers in April, you see that the movement draws heavily from two distinct socioeconomic groups: those with family incomes between $50,000 and $75,000 (which includes many working class whites) and those with family incomes over $100,000. When asked about his own support among Tea Partiers, Rand Paul estimated that about 25 percent were his father’s diehards and the other 75 percent came to him independently of his father.

The meshing of these two groups hasn’t always been easy. Rand Paul inspired endless hand-wringing on a blog of hard-core supporters last November after saying he’d welcome Palin’s help on the campaign trail. “Sarah Palin is an idiot and we don't like her representing Rand Paul. But it's his choice. We don't have to support everything he does,” went one typical comment. But, as a candidate, Paul worked furiously to achieve his fusion—ditching some of his father’s baroque detours into monetary history and playing up the argument’s populist appeal, often disingenuously. “[M]any of the people who have been gravitating to the Democrat Party are working class,” he said at an October 2009 event. “And I think our message can resonate with them. Because … the rising prices at the pump and in the grocery store. Who’s hurt worst by those? People on fixed incomes and those on the lower part of the socio-economic ladder.” As Paul’s Senate victory shows, the project is succeeding beyond expectation.

That’s alarming for two reasons. First, the level of anger that must exist before poorly informed voters work themselves into a frenzy over interest-rate decisions intended to benefit them has to be pretty intense—so much so as to be politically destabilizing. Second, this turns out to be the latest, most audacious step in a decades-long effort by conservative elites to enlist the working class in undermining institutions that were previously insulated from politics, and which can only really function outside the political realm. Under the Bush administration, this coalition did lasting damage to our ability to competently fight wars, defuse existential climate threats, and generally advance scientific knowledge. Now, it’s coming after the most basic functions of the Fed.

Don’t get me wrong: I think criticizing the Fed is an entirely healthy thing. I, for one, am sympathetic to the Pauls’ concern that periods of excessively low interest rates can lead to bubbles, and I do worry that quantitative easing may create similar problems. (Though I don’t see many great alternatives.) Likewise, the Fed didn’t exactly cover itself in glory in the run-up to the crisis, and its bailout of AIG was unsavory even to those involved. But what Palin and likeminded politicians are doing now isn’t good-faith criticism. That requires a baseline understanding of what the Fed does, and grappling with it honestly. What’s going on now is a political campaign intended to de-legitimize technocracy. (As exhibit A, I’d direct you to the presence of the esteemed monetary economist William Kristol at the center of the anti-Fed movement.) And it’s reaching further into the government than ever before.

After all, even the avowedly anti-expert Bushies appointed a highly skilled technocrat as Federal Reserve chairman, the single most important economic policymaker in the world. If present trends continue, though, it will be hard to imagine the next Republican president making a similar appointment. By a long shot.

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