In recent days, we have witnessed an astonishing about-face by Republican politicians on policies that were anathema to them just a few short years or even weeks ago. Democrats must use the occasion to press home the fundamental wrongheadedness of the Republican worldview before they inevitably reverse course and pretend that nothing has changed.
Let’s start with stimulus. I remember early 2009, when the economy was melting under the weight of home foreclosures and bankruptcies that led to what is now called the Great Recession, the second worst economic downturn in history after the Great Depression.
Conservative economists opposed fiscal stimulus for various reasons. They said it would not work because the deficit took out of the economy whatever the stimulus put in, making it a wash, economically. They said that any government stimulus would delay the necessary economic readjustment and sow the seeds of the next recession. The deficit was already too large and stimulus would only make it worse; fiscal prudence would do more to revive the economy than make-work jobs and such, many argued.
Implicitly, Republicans favored a do-nothing policy. I don’t recall any meaningful alternative stimulus program. Indeed, I still recall some saying government spending should be slashed to reduce the burden of government, which would be the best stimulus. None seemed to be aware that this is exactly what Franklin Roosevelt did in 1937 and it quickly led to a sharp economic downturn.
Republicans also decried bailouts for private businesses, especially those carried out under Tarp, the Troubled Asset Relief Program. Subsequently, Republicans universally blamed Barack Obama for any problems with this program even though it was proposed, enacted and signed into law by George W Bush.
A few conservative academic economists resisted the do-nothing approach, rightly fearing a replay of the Great Depression, which only got so bad because of Herbert Hoover’s do-nothing policies in 1929-1933. But they also argued that fiscal stimulus was unnecessary and counterproductive. Rather, they said that the Federal Reserve could fix the problem easily with no need to expand government.
Such economists, such as Anna J Schwartz and Robert Lucas, harkened back to the work of Milton Friedman, who died in 2006. He had argued that the Great Depression was due solely to the Fed’s mistake in allowing the money supply to shrink by a third, which created deflation. This came about because when banks went under in those days depositors lost everything; their money, which was mostly in the form of checking accounts, literally disappeared.
Friedman said that the Fed could have countered this deflation by buying vast amounts of Treasury securities and creating the money out of thin air to do so. Indeed, that is the Fed’s standard operating procedure to this day, which is called an open-market operation. It increases the money supply and leads to economic expansion – and inflation, eventually. Conversely, when the Fed sells securities from its portfolio the money supply shrinks and inflationary pressure diminishes.
As it happened, the chairman of the Fed at that time was a Republican economist named Ben Bernanke, who had previously served as George W Bush’s principal economic adviser. Bernanke was also extremely familiar with Friedman’s work, having devoted his academic career to studying it. Bernanke implemented exactly the policies Friedman would have advocated and it successfully kept the banking system from imploding as it did during the Great Depression.
Rather than praise Bernanke, however, conservative economists largely turned against him. So opposed were they to any stimulus whatsoever they even opposed what Friedman advocated. By 2010, they were predicting hyperinflation from Bernanke’s policies and he was urged to reverse them as soon as possible.
Now, of course, all these conservative ideas have gone out the window. Republicans are pushing a $2tn stimulus, even though just a few weeks ago the $1tn Green New Deal to save the planet itself was deemed too expensive. A huge chunk of the stimulus is in the form of bailouts for big businesses. Opposition to such bailouts led to creation of the Tea Party in 2009. Where are they today? (Sound of crickets chirping.)
The chairman of the Fed, Republican Jay Powell, appointed by Donald Trump, is pumping up the money supply with his foot all the way down on the accelerator. (Disclosure: Powell and I worked together at the treasury department.) Yet Trump and his staff continually berate him for not being even more aggressive. No letters from conservative economists warning of hyperinflation are anywhere in sight.
The hypocrisy is so thick you can choke on it, but at least for now we need fiscal stimulus, easy money and maybe some bailouts too for the same reasons we needed them back in 2009, when virtually every Republican in Congress voted against Obama’s $800bn stimulus, much more modest than Trump’s.
However, Republicans’ propensity to lie and reverse course when it suits them means they will inevitably become born-again deficit hawks warning about the evil Fed and its hyperinflationary policies one minute after Joe Biden is elected. I have warned about this before in the Guardian. Just as Bill Clinton wasted most of his first year getting a budget deal passed, I expect that Republicans and their allies on Wall Street will do the same to Biden.
Bruce Bartlett is an economist who has worked on Capitol Hill, in the White House, and at the treasury department. He was deeply involved in Republican economic policymaking from 1976 until 2005, when changing economic circumstances led him away from the policies he had previously supported. He is now an independent