Odd monetary policy ideas are coming so fast and quickly from the right these days that I can’t quite tell if Newt Gingrich’s notion that we ought to be “returning to the Reagan-era monetary policies” is a great idea or a terrible one. The problem is that rather than proposing this as an effort to boost employment, Gingrich says we should “strengthen the dollar by returning to the Reagan-era monetary policies that stopped runaway inflation and reforming the Federal Reserve to promote transparency.”
The problem, as we’ve seen before, is that a review of 30 years of inflation history makes it clear that Reagan-era policies featured much higher inflation than Obama-era ones:
Now by my lights, this is a perfectly good idea. A wide range of economists from Paul Krugman, Olivier Blanchard, and Mark Thoma on the left to Greg Mankiw, Tyler Cowen, and Scott Sumner on the right think that setting a 4 percent inflation target will stimulate real output and reduce unemployment. Indeed, Federal Reserve Chairman Ben Bernanke himself agrees that this would work, but refuses to do it anyway. Under the circumstances, political pressure for a return to “Reagan-era monetary policy” could do a lot of good.
Conversely, if by “Reagan-era monetary policy” Gingrich means that we need to stop “runaway inflation” then of course the question is what runaway inflation is he talking about. Inflation is much lower than it was during the late Reagan years, and wildly lower than it was when Reagan took office.