It's been a dismal few years for the dismal science, but even more so for the Republicans. The GOP has responded to the worst economic crisis since the Great Depression by rediscovering the failed policies of the Great Depression. Hoovernomics -- tight money and tight budgets amidst a slump -- has become the new, old dogma of the Republican Party. It's a policy impervious to empirical evidence. Or, as House Speaker John Boenher showed, unaware of it.
On Thursday, Boehner sat down with Maria Bartiromo of CNBC to talk about the economy. Here's what he said about why markets have fallen so much the past few days:
But sell off is in large part due to the policies that we've had coming out of the Federal Reserve. You know, you can't continue to deflate our money and deflate it and deflate it-- have equity markets go-- without some change, yeah. Bernanke has made it clear he's doing these policies in the absence of the government doing its part to help improve our economy.
That's why Democrats and Republicans here on Capitol Hill and the president need to deal with-- fix our tax code that would help us promote more economic growth and deal with our long term spending problem. We've spent more money than what we've brought in for 55 of the last 60 years. That ought to scare the hell out of every American.
Bookmark this, print it out, and put it in a time capsule, because this is about as wrong as anybody could possibly be about economics (excluding Don Luskin, of course). Now, Boehner doesn't put it very clearly, but when he says markets are going down because Bernanke is "deflating the dollar", he means markets are in the red because the Fed is weakening the dollar. The opposite is true. Markets sold off not because the Fed is doing too much, but because markets worry it won't do enough. As you can see below from Bloomberg, the dollar went up during the recent sell-off on Wednesday and Thursday after Bernanke explained how and when the Fed expects to wind down QE3. That's what happens when the Fed tightens policy.
For all the talk of "currency debasement" from conservatives who fancy themselves monetary experts, the dollar is actually stronger today than it was when the Great Recession began. Core PCE inflation, the Fed's preferred measure, just hit a 50-year low at 1.05 percent. And no, stripping out food and energy prices isn't hiding the inflation monster: headline PCE inflation was a meager 0.74 percent in April. Weimar we are not.
Boehner was no more coherent on fiscal policy. Now, it's true that Bernanke would like to see some kind of budget deal that reins in long-term deficits, but he wishes we were doing less to try to rein in short-term deficits. In other words, he wants less austerity now, and more austerity later. Here's what Bernanke said about about our cutting-spending problem in his press conference on Wednesday:
The main drag or the main headwind to growth this year is, as you know, is the federal fiscal policy, which the CBO estimates is something on the order of 1.5 percentage points of growth.
That's not exactly the clarion call for future spending cuts that Boehner imagines. It's a plea, in the understated lexicon of central bankers, to stop maiming the recovery with pointless and premature austerity. But Boehner either isn't listening or doesn't understand. He somehow thinks it's scary that the government has run deficits for 55 of the last 60 years (though not so scary that he didn't vote for many of those budgets). This is nonsense. As Josh Barro points out, there's no better proof that we shouldn't be scared of deficits than the fact that we have run them for 55 of the past 60 years without any problem. As long as the economy grows faster than the debt, there's no reason we can't run deficits forever.
We tried Hoovernomics. It failed. So we're ... trying it again? As Jim Pethokoukis of AEI points out, the ECB has followed the type of tight money policy the Republicans want for the Fed, and it's been a disaster. The same is true, of course, of austerity. Euro-area countries have tried to cut deficits even more aggressively than in the U.S., and it's mostly been a counterproductive failure. This tight monetary and fiscal policy has pushed the euro zone back into recession the past year and a half, and sent unemployment over 12 percent. But the Republicans seem to think all this counter-evidence vindicates their push for less monetary and fiscal stimulus. They work backwards from the conclusion that the Fed is destroying the dollar and deficits are destroying confidence, and then interpret reality through that lens.
It's a triumph of faith over facts that makes us all hostages of defunct economists.
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