Tuesday night's Republican debate on the Fox Business Network was the best debate of the season so far. The moderators asked good, tough questions that elicited differences on issues and weaknesses in policy positions without trying to place themselves, scoring points off the candidates, at the center of the show. It featured a substantial confrontation between Marco Rubio and Rand Paul over interventionist foreign policy, a tension within the Republican that deserves to be aired. All of the candidates were better prepared, though Ben Carson and Jeb Bush still conspicuously failed to shine.
It also featured that eternal stalwart of the Republican fringe: carping about how the Federal Reserve is destroying the value of the dollar.
"[A]s the Federal Reserve destroys the value of the currency," said Rand Paul, "what you're finding is that, if you're poor, if you make $20,000 a year and you have three or four kids, and you're trying to get by, as your prices rise or as the value of the dollar shrinks, these are the people that are hurt the worst."
Ted Cruz went even further, straight into gold-buggery, saying that "instead of adjusting monetary policy according to whims and getting it wrong over and over again and causing booms and busts, what the Fed should be doing is, No. 1, keeping our money tied to a stable level of gold."
John Kasich, whose appointed role in these debates seems to be serving as a practice dummy for the eventual nominee's Democratic opponent, seemed disturbed by the sound money fanatics. But he couldn't bring himself to make a strong argument; instead, he tepidly bashed the Fed while noting that giving Congress more control over the central bank might result in more inflation, not less.
Prominent feature of debate
Why was complaining about loose monetary policy such a prominent feature of the debate? Inflation is low. "Core" inflation -- the consumer price index minus volatile food and energy prices -- has been under 3 percent since the Bush administration, and is now resting a hair under 2 percent. At this rate of inflation, it would take more than 35 years for prices to double. The dollar is extremely strong against the euro, its major competitor currency, and also strong against the yen, which is the opposite of what you'd expect to see if loose Fed policy were destroying the value of the dollar.
When I asked this question on Twitter, critics chimed in that the prices of important things people buy had gone up massively. Food, gas, health care, education, rent are all up, so who cares if flat screen televisions have never been cheaper?
(This argument is normally offered by Democrats complaining about living standards at the bottom, so hearing it from another quarter was at least refreshing.)
The technical answer to these complaints is that the Fed doesn't control the prices of individual things. Monetary policy can be tight as a tick, and gas prices will still go up if gasoline is scarce. The price increases in the cited sectors were driven by factors outside of monetary policy: Chinese demand for commodities that pushed up prices of food and energy, a collapse in new construction and tighter mortgage standards that reduced the supply of rental housing even as demand soared. Health care and higher education costs have been increasing at above the rate of inflation for decades.
But of course, the average voter isn't well versed in monetary economics. The argument may have emotional resonance with the base even if the economic logic is faulty.
Even as an empirical matter, however, this argument looks shaky. Inflation in grocery prices has been basically flat for more than a year. Fuel and utilities are lower than they were a year ago, while health care inflation has been a dainty 2.5 percent. Only rent, at 3.9 percent, and college tuition and fees, at 3.6 percent, come close to matching the story of an out-of-control Fed. But rent is offset by what record-low interest rates are doing for mortgage-holders, and homeowners are more numerous than renters. These changes have been around long enough for people to notice them. So why do the candidates think this is a winning issue?
A look at wages
One answer is that wages haven't necessarily kept up with inflation. Indeed, if you look at the median weekly earnings of those employed full time, they're actually slightly down from 2009-10. Now, that's an artifact of the crisis: Prices crashed as employment fell, so those with jobs actually saw their purchasing power increase, while a lot of people saw the purchasing power of their earnings fall to zero. But still, if you had a job in 2010, you may feel as if you're now losing ground, even though the real value of your earnings is up from 2008.
And of course, these are just averages. One way that the economy adjusts during a recession is for employers to fire excess workers. But employers hate to do this; it's terrible for morale, and the employers often feel bad about it. They'd much rather lower wages and keep everyone employed. Unfortunately, this is also bad for morale, and unlike firings, which deliver a one-time hit to morale, when you lower wages, your workers are reminded that they're mad every time they get their paychecks. This is known as the "sticky wage problem," and it explains why the brunt of a recession is borne by workers who lose their jobs, rather than by adjusting wages and salaries downward.
Inflation eases the sticky wage problem: You hold wages constant, and let inflation eat away the real value of the compensation until it's in line with the company's newly reduced expectations. It's better for morale than an outright pay cut, and kinder than firing your least productive workers. With inflation so low, this takes a long time, but over the last seven years, workers who got no raises will have seen an average 10 percent decrease in the buying power of their salaries. Many workers have gotten raises to keep up with inflation, of course, which is why real compensation is roughly flat. But some people, possibly many people, have seen a real and substantial decline. And since we had so much inflation in sectors that you really don't have much choice about consuming, like food and gas, that hurts.
Also, many people are now required to buy health insurance. Yes, they are getting some value for that insurance -- they face less risk of catastrophic medical expenses, and the people who qualify for subsidies get an even better deal. But the risk they're insured against is a risk that most people didn't encounter even over a seven- or eight-year period. On the other hand, they encounter their premium bill every month.
Finally, of course, we have to note that the Republican base tends to be old. Older people are especially hurt by inflation. Their Social Security benefits are indexed for inflation, but many of their other investments aren't. A lot of seniors rely on fixed income investments, including bank savings, that haven't done much in the era of ultra-low interest rates. With interest rates so low, any inflation at all pinches.
That still doesn't make a gold standard a good idea, because it isn't. Or even extra-tight monetary policy that benefits debt holders while heaping additional pain on folks who have mortgages and car loans, and whose wages are stagnant, which is a no-fail recipe for mass defaults. But it does explain why we can probably expect to hear complaints about the Fed for some time to come.
Megan McArdle, a Bloomberg View columnist, writes on economics, business and public policy.