Yesterday Rep. Mike Pence, Republican of Indiana, chairman of the House Republican Conference and likely candidate for governor of Indiana gave an important speech to the Detroit Economic Club. We know it was important because Pence’s staff told everyone it was and because it was given at a venue where many important economic speeches by the likes of John F. Kennedy have been given. So my expectations were pretty high when I sat down to read it. Here, I thought, I will finally find a serious Republican analysis of our economic problems and serious proposals for fixing them.
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.
But Pence and Kudlow don’t draw the line just at demanding a strong dollar regardless of the economic circumstances, they would hold American monetary policy–and hence the economy as a whole–hostage to the fluctuations of the price of one commodity: gold. If the price of gold rose, as it has lately, the Treasury and the Fed (assuming there still is a Fed, which most gold bugs like Ron Paul believe should be abolished) would be required to deflate the economy; to tighten monetary policy and force down all wages and prices until the price of gold fell back to whatever arbitrary level it had been set at. And it’s worth reminding right wingers who claim to worship at the alter of Milton Friedman that he thought the gold standard was completely nuts. There is also no doubt that he would be supporting the Fed’s policy of quantitative easing since he have the same identical advice to Japan in the same circumstances.
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