Rick Perry, Ben Bernanke, and the Middle Class

08/16/2011 03:00 pm ET | Updated Oct 16, 2011
  • Jared Bernstein Fmr. Obama administration economist; CNBC and MSNBC contributor

Just when you thought our politics couldn't get any weirder, I think Texas Governor Rick Perry just threatened to beat up Ben Bernanke for suggesting another round of quantitative easing.

Responding to a question about the Federal Reserve at a campaign event in Cedar Rapids, Perry said: "If this guy prints more money between now and the election, I don't know what y'all would do to him in Iowa, but we would treat him pretty ugly down in Texas.

I wish I was making this stuff up, folks... I really do... but I'm not.

(Does this mean the Fed research team needs to add a new variable into their impact models?... i.e., the estimate of the impact of monetary easing on long-term rates, conditional on the Chairman getting a fat lip.)

Perhaps Gov. Perry is just looking over his shoulder at Ron Paul, who's always bashing the Fed (and was a close second to Rep. Bachmann in the Iowa poll), but let's take a look at the economics in play here.

Quantitative easing (QE) is when the Fed "prints money" -- really just bytes in Fed and Treasury electronic bank accounts -- to buy longer term bonds, either Treasuries or mortgage bonds with the goal of lowering interest rates and stimulating more economic activity. They've done two rounds so far and estimates suggest they lowered long term interest rates by somewhere between 60 basis points (0.60 of a percentage point) to more than 1%. (Scholars of intermediate macro: they're pushing out the LM curve!)

Perry went on to complain about "devaluing the dollar in your pocket" based on the notion that if you're printing money, you're creating inflation. And as I and others -- most notably Ken Rogoff -- have argued recently, that would help right now.

First off, faster inflation lowers the real interest rate -- that's the nominal rate minus inflation. So if a business is thinking of building a new factory, and the interest rate on the loan it needs is 4% and inflation is 3%, then the real rate faced by the borrower is 1%. That's especially germane right now with corporations sitting on fat cash reserves. A little more inflation in the system could nudge them off of the sidelines.

More inflation also speeds up the ongoing deleveraging cycle by eroding the real value of households' debt burdens.

That said, a commenter the other day raised a good question about this: how can I, as someone who actively worries about real wage losses, advocate higher inflation, which all else equal, means lower real wages?

It's the "all else equal" part -- lower real rates and more deleveraging means faster growth and lower unemployment, which itself should help boost job and wage growth.

Here's the punchline of all this -- and be clear that I'm not talking about very high inflation, which hurts everyone.

I have no idea if this is where Gov. Perry is coming from, but what's really behind conservatives' view on this issue is that the wealthy get hurt a lot more by inflation than by unemployment, and visa-versa for the middle class. (Remember, I'm talking 2-4% inflation here, nothing higher.)

For those living off of capital (versus labor) income, inflation erodes their assets, their wealth, their capital. So lower real interest rates, faster growth, lower unemployment ain't what gets them out of bed in the morning. That's also why the editorial page of the WSJ, for example, permanently campaigns against anything that would "weaken" the dollar.

Why just last night, I was on the Kudlow show arguing against someone who wanted us back on a the gold standard (!!), the natural conclusion of sentiments like Gov Perry's, and a fine way to cut the Fed off at the knees and ensure deflation at a time like this.

And, of course, the other "punch"line: Ben, you might want to let things settle down a bit before you mosey on down to Texas.

This post originally appeared at Jared Bernstein's On The Economy blog.