Bruce Bartlett hoped Mike Pence’s big address on economic policy might reveal a Republican wrestling seriously with the world’s economic problems. As a long-time Pence watcher, I assumed he’d just say something dumb. Bartlett has learned his lesson:
Unfortunately, Pence’s speech was nothing of the kind. It was a hackneyed rehash of every simplistic idea ever floated on Larry Kudlow’s TV show, which appears to be the only source of information Pence has on the economy. I don’t know how else to explain his obsession with inflation, a strong dollar, Fed bashing, tax cuts and the gold standard. Pence could have given the same identical speech in 1980 and barely needed to change a word. In the Pence/Kudlow world it is always 1980–stagflation is the primary problem and tight money and tax cuts are the cures.
The problem is that stagflation isn’t the problem today. We have stagnation all right, but the “flation” we are suffering from today doesn’t stand for inflation, but deflation. But because it is always 1980, right wingers are incapable of seeing that monetary policy functions very, very differently in an inflationary and a deflationary environment. They seem utterly incapable of comprehending constraints like the zero-bound problem, which sets a floor on how low interest rates can go. They are also incapable of seeing the exchange value of the dollar except in macho terms, which demands that the dollar be strong at all times. That makes about as much sense as saying the price of oil or any other commodity should always be strong. That’s obviously nuts, but the dollar is no different. It must be allowed to adjust freely for changes in supply and demand or the result will be imbalances–too much will be imported if the dollar is overvalued, too little exports, thus increasing American’s international indebtedness. Indeed, it was right wing saint Milton Friedman who taught economists the truth of this mechanism.
There do seem to be a lot of people, Pence among them, who have a weird amount of trouble with the idea that you do different things in different circumstances. If inflation’s too high, you need tighter money—that’s the early 1980s. But if nominal expenditures are too low, you need looser money. If high deficits are forcing the central bank to keep nominal interest rates high, you need a lower deficit—that’s the early 1990s. But if nominal rates are at zero and total spending is still too low, then you need a bigger deficit.