Stephen Moore: I’ve been right with Federal Reserve policy many times

With just a little more than two years of President Trump being in office, it should be clear to everyone that the left will engage in its scorched earth battle tactics to destroy almost anyone that he will nominate for anything. That obviously includes me, so I do not take it personally. However, it does matter who is on the board of the Federal Reserve, and who influences the internal debate about how it exercises its enormous government power.

I have been right a lot more than I have been wrong on monetary policy. The most recent vindication has been my harsh criticism of the Federal Reserve decision to raise interest rates last fall when there was no inflation anywhere to be seen and commodity prices had been suffering a severe deflation. Even the Federal Reserve itself acknowledged at the start of this year, after a near 4,000 point decline in the Dow Jones Industrial Average from September through December, that it had indeed made a terrible mistake. Since reversing course in January, the economy and the stock market have been on a tear, and there is still no inflation. I rest my case.

Paul Krugman of the New York Times attacked me for speaking positively about the gold standard in the past. The sheer truth is that the monetary stability provided by the Bretton Woods gold standard helped to make the period of 1948 to 1971 into the American golden age of economic growth and middle class prosperity. The left likes to point this out all the time. My view is that ending the Bretton Woods gold standard in 1971 was a huge mistake and a major factor in the catastrophic tidal wave of inflation that squashed real take home pay for middle class workers in that decade.

{mosads}However, I do not advocate a return to the gold standard today. I now support basing monetary policy upon general commodity prices for oil, wheat, cotton, copper, and so on. I also look at asset prices and other measures of price changes, such as the Consumer Price Index. The Federal Reserve should foster maximum prosperity by holding prices constant and keeping the dollar strong. Combined with tax cuts and deregulatory initiatives, that could give us growth of 3 percent and above along with rising wages without inflation for years to come.

I have also been asked why I, along with many others, falsely predicted high inflation in the aftermath of the financial crisis and the frantic rounds of “quantitative easing” by the Federal Reserve, which added trillions of dollars to its balance sheet. What I did not appreciate at the time was the deflationary impact of the “interest on reserves” policy, which sucked money out of the economy at the same time the Federal Reserve was trying to pour it in by buying bonds and mortgage backed securities.

I believe that the commencement of the “interest on reserves” policy in October 2008 was a total blunder. It eliminated the ability of the Federal Reserve to inject dollar liquidity into the economy. The Federal Reserve seemed to think that paying big banks nearly $40 billion a year to sit on money with the “interest on reserves” policy was a good idea. I disagree.

The larger lesson from the failed period following the recession was that almost all of the government interventions, from tax increases to massive bailouts to the $830 billion stimulus plan to ObamaCare and Dodd Frank regulations, were wrongheaded and contributed to a very weak recovery. They delivered half of the 4 percent annual growth that the Keynesian analysts expected. Even the forecasts of President Obama showed that the economy would have grown faster without these policies. No amount of money creation would have reversed the curse of these bad policies.

Another criticism by Professor Krugman and others is for my claim that Federal Reserve economists have the “wrong model” in mind. When I get to the Federal Reserve, I will challenge the “Phillips Curve” austerity model that too much growth causes inflation. A corollary is the false belief that the economy can only grow at 2 percent because of “secular stagnation.” This is just an excuse for the lousy performance before Trump. From 2001 to 2016, the economy grew at barely 2 percent. Trump has since brought us up to 3 percent. When President Reagan instituted supply side tax cuts with the sound monetary policy of Paul Volcker, the economy surged by well over 3 percent each year from 1983 to 2000 with controlled inflation.

That is the beautiful picture I want to help recreate at the Federal Reserve. Think rising wages, lower taxes, less regulatory drag, and rapid growth in take home pay, all with no inflation. True growth reduces inflation rather than ignites it. The academic economists may not like this challenge to their limits to growth orthodoxy, but I think most American workers and businesses will say it is about time that someone bring this prosperity maximizing philosophy to those hallowed halls of the Federal Reserve.

Stephen Moore, a longtime contributor to The Hill and a nominee to the Federal Reserve Board of Governors, is a visiting fellow at the Heritage Foundation and a consultant with FreedomWorks. He was an economic adviser to the Donald Trump campaign. His book with Arthur Laffer is “Trumponomics: Inside the America First Plan to Revive Our Economy.”