Republican presidential candidate Ben Carson has what one might charitably call an idiosyncratic understanding of monetary policy and its relationship to the national debt.
Marketplace, a radio program hosted by Kai Ryssdal conducted, and posted to its website, a detailed interview with Carson on economic issues.
Here’s a key exchange, nearly half-way through their discussion:
RYSSDAL: Since you brought her up, what do you think of Janet Yellen and the Federal Reserve?
CARSON: Well, you know, I’ve known Janet Yellen for a long time. We’ve served on boards together, and she’s a very intelligent individual, very responsible, and obviously is trying to do what she thinks is right. But she’s caught between a rock and a hard place, and I understand that. And that’s why I would tend to really put the emphasis on driving down our debt, because that’s how we begin to correct the problem. You know, unless we correct the fundamental problems, all the other stuff we’re doing isn’t going to matter that much.
Why that is Odd
So, apparently, Ben Carson is under the impression that the Federal Reserve cannot normalize interest rates because the national debt is what it is. Presumably he understands that Yellen cannot act unilaterally in this matter, but that isn’t the problem. It would be good to have presidential candidates understand that the Fed board does not look to interest rates as a way of keeping the U.S. debt under control.
Yes, Yellen (using her name as a synecdoche) has flinched of late at the prospect of normalizing rates. But the reasons for this involve her/their reading of the general health of the economy, and the usual Keynesian premise that a little inflation is a handy stimulus, or (its corollary) that any deflationary trend would prove disastrous. They also involve pressure from the IMF, but the same philosophical considerations are operating there.
Jordan Weissman chronicles this and other Carson statements on related policy matters in the moneybox column of Slate. He offers a charitable view of what Carson may have meant by the paragraph italicized above. Carson may mean that higher rates of interest, and the higher level of over-all sovereign indebtedness that would presumably follow, would slow down a country’s broad economic growth. If so, he is buying into a causal connection associated with the work of Carmen Reinhart and Kenneth Rogoff.
The problem, though, is that Reinhart and Rogoff went out on a limb empirically, and logically as well.
Assume for purposes of discussion that there is a close and unquestioned correlation between the level of sovereign indebtedness above 90% of gross domestic product and the growth of the underlying economy. The logical question would then be: does this establish that high indebtedness slows growth? And the obvious answer would be: no, correlation doesn’t establish causation. Low growth, after all, could cause high indebtedness, by inspiring various ill-fated stimulative projects and/or by cutting the available tax base. Or the two sides of the correlation could both be the consequence of various third factors.
So Carson is at best going out on a couple of dubious limbs with Reinhart and Rogoff. At worst, he is simply, and uninformedly, winging it in such interview responses.
Be Smart in Opposing Keynes
I’m not saying any of this because I agree with the Keynesian consensus in such matters (i.e. that a little inflation is a good thing, so the Fed has been right to keep interest rates near zero in recent years.) I am not interested in scoring against Carson or anyone else as a heretic within that Church, since I have long since broken with the Keynesian Church myself.
Through the period 2003-06, the Federal Reserve kept rates very low, hoping to facilitate recovery from the rather mild recession with which the new millennium had begun. This policy had everything to do with the housing and housing derivatives bubble, and thus with the far more severe recession created when that one popped. As David Malpass observed in a perceptive recent op-ed in The Wall Street Journal, “growth [in this century’s first decade] would have been faster and more balanced if rates had been higher.” Though he phrased it well, Malpass’ point was not novel: I devoted a book to it myself. Three years ago.
Back to Carson, though. The problem is that on the basis of this interview, he doesn’t know enough about monetary policy to make Malpass’ point, or to resist on a level of principle those who argue for Keynesian positions. It would be wonderful to have a president of whom the contrary is true.
A wise president will be one who works to dismantle the system of fiat money for which Janet Yellen stands or, failing that, who presses the Fed to allow speculation and leverage to work themselves out within a stable monetary environment, the sort of environment where bubbles prick themselves before they can get large enough to do a lot of harm.