By Justin Talbot Zorn, Special to CNN
Editor’s note: Justin Talbot Zorn is a Public Service Fellow at Harvard's Kennedy School and has served as legislative director to two Democratic members of Congress. He researched long-term planning in government as a Fulbright Scholar in Singapore. The views expressed are his own.
There’s been an intriguing development in this otherwise dreary political year: the emergence of a serious multi-issue alliance between progressive Democrats and Tea Party Republicans. On big issues ranging from NSA spying and Syria to Farm Subsidies and Too-Big-To-Fail Banks, unlikely left-libertarian coalitions have shifted the balance of power in Washington.
Still, on the single issue that most animates Rand Paul’s army of Tea Party acolytes —the Fed’s loose money policies known as Quantitative Easing (QE)—there’s been little or no cross-party love. While some progressives have sought more transparency at the Federal Reserve, the left’s understandable preference has been to boost employment and wages through Fed-fueled consumer demand rather than to worry about any long-term imbalances caused by abnormally low interest rates.
This could change.
With the Senate confirmation vote on Fed-nominee Janet Yellen fast approaching, leading Republican economist Martin Feldstein penned a New York Times op-ed laying out a game-plan for conservatives who desperately want to rid the world of QE: Drop the resistance to jobs-oriented fiscal policy. He's right. If Congress could pass an employment-focused, deficit-neutral, long-term fiscal plan, the Federal Reserve would be free to end QE quickly. Both left and right would have something to celebrate.
The reasons the Tea Party opposes QE—the Fed’s practice of buying up mortgage-backed securities, Treasury bills, and other types of bonds to lower interest rates and stimulate the economy—are well documented. Most libertarians and conservatives believe that the Fed’s policies are causing investors to take excessive risks and inflate the value of stocks, land, homes, and all sorts of other commodities.
Yet there are also some Progressive reasons to be wary of QE. With debt-strapped families and small businesses unable to make much good use of cheap borrowing, the biggest gains from QE have gone to large corporations (many of which have used funds to engage in job-killing mergers and acquisitions) and the already-well-off who benefit from a booming stock market. QE is, in other words, more regressive than other forms of stimulus.
From a deeper progressive standpoint, QE is a measly Band-Aid on serious economic wounds. By focusing on increasing the money supply rather than directly making investments in needed low-carbon infrastructure, research and education to promote innovation, skills for workers displaced by technology and trade, and other long-term priorities, QE is promoting what the economist Jeffrey Sachs has called “crude Keynesianism.” It may ease some of today's economic problems, but it doesn't put us on the path to sustainable growth and employment.
Still, with more than 11 million officially unemployed, millions more forced out of the job market, and Congress making things much worse through austerity policies like the Budget Control Act, progressives have no choice but to support QE. The Fed is not only using its most potent tool to deal with unemployment–it's quite simply the only powerful actor in Washington that's doing anything to stimulate the economy.
This need not be the case. If QE truly is "treason"—as Rick Perry told Iowa Republicans to thunderous applause during the 2012 primary—the GOP should be willing to strike a bargain to stop it. Building on last week's bipartisan budget deal, conservatives should agree to deficit-neutral long-term fiscal package that includes serious investments in infrastructure and skills in order to boost employment and wages. From the Congressional Progressive Caucus's "Back to Work Budget" to President Obama's American Jobs Act, there are plenty of proposals that are fully paid-for and projected to reduce unemployment to the point that the Fed could cease its unprecedented actions.
If this sounds like a tall order for a group that was elected partly as backlash to the 2009 stimulus, you're right. It is. But, as the significant Tea Party support for last week's sequester-softening budget deal demonstrates, even some hardline conservatives are coming to realize that expansionary austerity was just a dream. Moreover, as Feldstein, Reagan's former top economic adviser, points out, an infrastructure-focused deal today could reflect lessons learned from 2009: It'd be better to take a year or two to prepare for the right kind of spending rather than use the lack of "shovel ready" projects as an excuse for inaction or low-impact spending. There are still plenty of easy options—like a national infrastructure bank—that could significantly boost employment without seriously upsetting the small government sensibilities of the GOP base.
Wednesday’s announcement by outgoing Chair Ben Bernanke that the central bank will slow the pace of bond buying ever-so-slightly in January is a signal that Fed governors are willing to rethink QE when job numbers improve significantly. But—unless we get back to employment-focused fiscal policy—such improvement is still a long way off. With QE-advocate Janet Yellen likely to be confirmed by the Senate any day now, we can expect to hear more from Tea Party politicians about how the Fed’s easy money is "ineffective" and "destructive" and how the Republican Party has an obligation to stop it. The power is in their hands.