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January 23, 2013 at 07:00 PM
Polarization has become a pervasive and much-noted feature of American politics. The two major parties are sharply divided over issues ranging from taxation to gun control to climate change, and much political discussion is characterized by considerable acrimony.
Such tensions spill over even into areas of life not tightly linked to the political fray. The Wall Street Journal reported last year that matchmaking services had found a growing unwillingness among clients to date members of the opposite party.
The recent fiscal cliff negotiations underscored the elusiveness of agreements between Democrats and Republicans, and the resulting deal set the stage for further showdowns over fiscal matters in the early months of this year.
The chasm between the parties tends to obscure some more subtle features of the political environment, such as underlying tensions within both parties and points of similarity among factions that might lead to some collaboration across party lines.
Let us look at some such internal disagreements and potential realignments and their potential to shake up the policymaking scene during the current Congress and the second term of the Obama administration.
Monetary Flux
The Federal Reserve has drawn intense Republican criticism in recent years. In 2010, Congressional leaders took an unusually interventionist approach by sending a letter to Chairman Ben Bernanke pressing the Fed to desist from further monetary stimulus.
In last year’s presidential primaries, hopefuls including Mitt Romney complained monetary policy was too loose. Rick Perry warned further easing would be “almost treasonous.” Ron Paul’s push to “end the Fed” was a keynote of his campaign, and Newt Gingrich praised Paul for being “right about the Federal Reserve for 25 years.”
The politics have been shuffled somewhat by the Federal Reserve’s stance, announced in December, of continuing bond purchases as long as unemployment stays above 6.5% and inflation is projected at below 2.5%. On one hand, such easing runs contrary to Republican calls for tight money and fears of inflation. On the other hand, it jibes well with another traditional Republican priority, for monetary policy to be more rule-based and predictable.
The two tendencies—for monetary policy to be tight, and to follow explicit rules—have often gone together. In a purist form, they combine in advocacy of a gold standard, an arrangement that would mean not just far tighter money but eliminating Fed policymakers’ discretion (plus, as Paul and others desire, eliminating the Fed altogether).
In adopting an expansive monetary policy, but one that follows rules, the Fed has moved somewhat in a direction prescribed by economists and pundits in a school of thought dubbed “market monetarism.” Market monetarists such as Bentley University economist Scott Sumner call for the Fed to target nominal GDP—in effect, to use monetary stimulus to seek steady growth even if some inflation arises as well.
Market monetarism has intellectual roots in the monetarism spearheaded by Milton Friedman in the latter decades of the 20th century, but seeks to circumvent problems of managing the money supply by focusing on the overall economy instead, and using futures markets as a gauge of the effectiveness of the Fed’s policies.
