Monetary Policy: The Most Important Policy
Scott Sumner has said that monetary policy was the Achilles heel of conservative/libertarian/free market economics all through the world in the 20th century. I am realizing how big a problem it still is. I always thought that it we be great if some twist of fate brought us President Ron Paul, because I think most of his proposed policies would make Americans much better off; my only big disagreement is with his monetary policy. However, I can’t say I disagreed when I read Adam Ozimek’s description of what hypothetical presidents would bring:
You know who else ran for President in 2008? Ron Paul. President Paul would have yanked out Bernanke and put in a gold bug, which would have outdone anything any other president could do, short of unnecessary nuclear war, in terms of a welfare loss. President Paul would have heralded in the Great Depression 2, not the Great Recession.
I don’t think it is unreasonable to expect a second Great Depression to do as much damage to free-markets and libertarian politics as the first. You might think that a libertarian president could get lucky and get elected during good economic times, when tight money would not push us all the way to a Depression. However, any President that does drastically shrink the government is going to cause a recession; almost every post-war demobilization is accompanied by a recession. This doesn’t mean we shouldn’t end wars or shrink government of course, but such times do call for an accommodative monetary policy- and given the current state of libertarian beliefs and politics, we are likely to get just the opposite. Unless we get a new Milton Friedman(who I guess is now a money-debasing statist), a libertarian president will be bent on bringing “sound money” and will be a disaster for the country and for free markets.