Arthur Laffer had an excellent piece in the WSJ a few days ago that laid out the challenges facing Federal Reserve Chairman Ben Bernanke. The gist of Laffer’s message is that there are no easy answers for Fed policy makers in their attempt to blunt the effects of a severe economic contraction. Characterizing the Fed’s options, Laffer notes that the Fed should, in the interests of long term economic prospects, reduce the recent historic surge money supply:
…a rapid contraction of the monetary base as I propose would cause a contraction in bank lending, or at best limited expansion. This is exactly what happened in 2000 and 2001 when the Fed contracted the monetary base the last time. The economy quickly dipped into recession. While the short-term pain of a deepened recession is quite sharp, the long-term consequences of double-digit inflation are devastating. For Fed Chairman Ben Bernanke it’s a Hobson’s choice. For me the issue is how to protect assets for my grandchildren.
Does this advice sound familiar? It should because it’s exactly what President Reagan did when he came into to office in 1981. Reagan allowed then Fed Chairman Volcker to contract the money supply because he knew that long term inflation would defeat his goals of increased economic growth. Herein lies the delimma and the present day denial of Congressional Democrats and President Obama. Neither are willing to make the courageous choice Reagan made (and courageous it was because it cost him dearly in the 1982 mid term elections) to ensure future growth. Rather, the Democrats seek short term political gain and tell voters not to worry about (and simply ignore) the future. Yet to be revealed is a coherent defense of Obama’s spending policies as they relate to future inflation and economic growth.
As yesterday’s Rassmusen polls indicate, voters understand this (at least intuitively). There is political traction to be had in the spending and inflation issue and the pushback against the Tea Party movement is a tacit admission of such by the Left. Voters that pay taxes, concerned about their future financial security, are looking for leadership similar to Reagan’s. They understand difficult choices and they understand near term pain and sacrifice. What they despise is rhetoric masquerading as leadership and political expediency that trumps fiscal responsibility.