Last month, a group of center-right policy experts and commentators released a statement of principles affirming the traditional values of American conservatives. Calling themselves “Freedom Conservatives,” they reaffirmed “the distinctive creed that made America great: that individual liberty is essential to the moral and physical strength of the nation.” Both the progressive left and nationalist right have abandoned this philosophy. Thankfully, there are many who have not yet given up on the principles of the American Founding. I was not among the initial drafters, but I was proud to add my signature.
A statement of principles is, by its nature, general and abstract. There are many concrete policies compatible with the ten points in the Freedom Conservative declaration. I want to focus on a specific question: What is the right macroeconomic agenda for Freedom Conservatism?
The statement itself gives some clues. Freedom Conservatism boldly proclaims the importance of free markets for national flourishing. We must uphold “the rule of law, freedom of contract, and freedom of association” while cracking down on the crony patronage that enriches the few at the expense of the many. This means undertaking ambitious supply-side reforms. The logic is obvious: Production comes before distribution and consumption. The American economy, to be strong, must first be productive. Freedom Conservatives rightly want to rein in “unaccountable and unelected regulators who routinely exceed their statutory authority,” which causes stagnation and inequality. First and foremost, we must unleash the supply side.
All well and good, but what about the demand side? The statement tells us one strategy that won’t work: fiscal activism. Massive federal debt, now exceeding America’s annual GDP, “is an existential threat to the future prosperity, liberty, and happiness of Americans.” It’s time to hit the brakes on modern monetary theory, functional finance, and anything else that justifies using the federal budget as an instrument of social control. Spending by Washington must focus on goals that are both constitutional and in the national interest. We must scale back spending so economic growth can lower our deficits and debt to sustainable levels.
Fiscal policy isn’t helpful for fighting recessions. Allowing politicians to use economic turmoil as an excuse to spend has, rather predictably, resulted in permanent profligacy. Keeping the economy on its long-term growth path is properly the job of the Federal Reserve, not Congress and the President. The central bank is ultimately responsible for determining aggregate demand, which (in the short run) affects where the economy is performing relative to aggregate supply.
But clearly we can’t leave the Fed to its own devices. We saw what that yielded: the worst inflation in 40 years. Voluntary guidelines, such as the Fed’s self-enforced inflation target, won’t fix this. Freedom Conservatives should get behind ambitious Fed reforms of its monetary and banking mandates.
The Fed’s monetary mandate, given by Congress, is stable prices, full employment, and moderate long-run interest rates. In practice, two out of the three are redundant. The Fed can only promote employment and keep interest rates steady by anchoring the dollar’s purchasing power. We need a strict monetary rule that forces the Fed to stabilize aggregate demand. Reasonable people can disagree on the content of the rule. The most popular is probably a congressionally imposed and enforced inflation target. I myself prefer a nominal spending target. What matters most is bringing the rule of law to monetary policy. Freedom Conservatives ought to insist we bind the Fed’s hands much more tightly than we currently do.
The banking mandate pertains to the Fed’s oversight of the financial system. Whereas monetary policy is about creating or destroying base money, banking policy is about credit allocation and regulation. The Fed has been far too eager to steer credit to preferred interest groups, rather than stabilizing the overall economy. And its regulations, ostensibly to promote bank safety, have been ineffective at best and destructive at worst. Freedom Conservatives should consider supporting limits to special-purpose vehicles and other mechanisms for purchasing non-traditional assets, closing the discount window, and limiting the Fed’s regulations to maintaining adequate short-term bank capital. Anything more than this is an invitation to technocratic tinkering.
Policies and institutions that boost aggregate supply and prevent big swings in aggregate demand fit naturally with Freedom Conservatism. This agenda can revitalize our economy while returning our government to Constitutional principles at the same time. Promoting freedom and opportunity is both-and, not either-or.