Forget left and right. The real divide is technocrats versus populists.
A favorite theme of American business and political elites at the moment is that authoritarian regimes—i.e., China—may be better at making hard, long-term economic decisions than are querulous democracies—i.e., the United States. There is plenty of academic research to suggest that, over the long term, this view is wrong. But in the shorter term—this week in fact—America itself offered a case study of this scary theory.
Consider: On Tuesday, Americans swung sharply to the right, giving their Democratic President a shellacking and handing control of the House of Representatives to the Republicans. The country’s most powerful elected Republican, John Boehner, who will be the new speaker, immediately declared it was a vote for “cutting spending” and “smaller, less costly government.” Most analysts, including happy ones on Wall Street, who are often most cheerful when the country’s elected officials are least active, decided it was a vote for gridlock, thanks to the Democrats’ continued control of both the Senate and the White House.
Then, on Wednesday, America’s most powerful unelected Republican, Ben Bernanke, the chairman of the Federal Reserve, swooped in with massive government action, announcing a plan to pump $600 billion dollars into the U.S. economy over the next two years. That is not much smaller than two of the big government interventions that earned the Democrats their shellacking—the $700 billion TARP program (never mind the pesky fact that it was actually a Republican Secretary of the Treasury who invented it) and the $787 billion stimulus.
The timing of the Fed’s move underlined one of the most important take-aways from the mid-term election campaign. Watch cable news or surf the web and you are likely to conclude that America is a deeply divided nation, split between fiercely partisan hardliners on the left and on the right. That’s one version of the political battle. But another one is that America is indeed divided, only, in this narrative, the division isn’t between liberals and conservatives, it is between the hoi polloi and the elite.
That split between the mandarins and the public is how you get a popular vote for government inaction the day before the bi-partisan, Republican-led technocrats at the Federal Reserve, with only one dissenting vote, endorse massive government intervention. The economic battle in America today isn’t just between the Republicans and the Democrats, it is between the technocrats and the populists, and in the later contest, the Bush-nominee who runs the Federal Reserve probably has more in common with the beaten up Democratic President than he does with the victorious leaders of his own party.
Of course, this sort of national divide is the main reason central banks are independent: rich western democracies decided some time ago that long-term objectives of monetary policy are best judged by a technocratic elite, not by elected politicians and the sometimes angry constituencies who choose them.
But turning over responsibility for pulling America out of its recession to the unelected chiefs of the Federal Reserve—which is likely to be the big practical result of this week’s vote—is not without some tricky consequences. For one thing, it is clear that America’s central bank would prefer that its monetary stimulus be accompanied by a fiscal one—a measure that seems almost impossible after this week’s vote. That means that the money Washington is pouring into the economy will go first to those who need it least—banks, businesses and families with strong-balance sheets are in the best position to take advantage of the cheap money flooding into America. The unemployed—who figured prominently in the Fed statement and were one of the direct targets of last year’s fiscal stimulus—far much further down the food-chain, as will the Americans grappling with foreclosure.
A second result is that punting the task of economic revival to the Fed may ultimately mean sending the bill to the rest of the world. Printing dollars is one way to make it easier for the American government to solve one of its looming, long-term problems—paying off its massive foreign debt. No one wants to admit to inflation as a policy solution, but that’s what political gridlock and an interventionist Fed could amount to—and that sleepwalking policy is Washington’s real ‘don’t ask, don’t tell’ secret.