Why Larry Kudlow is Not Conservative

National Review Online is an important part of the conservative movement, and plays a central role advancing conservative ideas in the United States. Thousands of conservatives across the United States turn to NRO for analysis and insight into important issues facing America. This makes Larry Kudlow's use of NRO Financial as a vehicle for advocating the failed liberal economic policy of printing money to lift America out of the recession all the more distressing. I want to be clear - Mr. Kudlow is not a liberal and believes in free markets. However, on the issue of monetary policy, he abandons sound conservative policies.

Kudlow's writings as editor of NRO Financial are variants on of one of two themes. The first, reducing the marginal tax burden on savings and investment, is a worthy conservative position that National Review should support. The second, a call for the Federal Reserve to create vast amounts of money under virtually all circumstances, is not.

A quick examination of Mr. Kudlow's articles over the past two years demonstrates that he believes that printing of hundreds of billions of new dollars will restore America to prosperity. Consider:

If I thought the Fed would add plenty of new money by purchasing 10-year Treasury notes … then I'd say abandon the fed funds rate target altogether and just keep buying Treasuries until commodity prices, including gold, go up another 10 to 20 percent from current levels. That would tell us that the economy is well supplied with cash. (June 23, 2003)
Mr. Greenspan and all his little maestros need to pour it on. This is no time to take chances. Add more money … it's up to the Fed to show us the money. (June 17, 2003)
Most supply-siders disagree, but Alan Greenspan & Co. should turn the money spigots wide open that day - more than they have thus far in this reflation cycle. I'm talking about shock-and-awe level accommodation from the Fed. (June 17, 2003)
The Fed, however, could provide some better guidance … they could have given some indication that the monetary printing presses will be tanned, rested, and ready to create more liquidity should a wartime emergency arise. (March 20, 2003)
As long as the Federal Reserve keeps pumping the economy with sufficient new cash to boost investing, spending, and saving, it looks like we're set for something of an economic boom next year. (Dec. 19, 2002)
As a result of this liquidity expansion, the monetary base increased by roughly 9% in 2001. As this money circulates through the economy, it will generate a higher level of nominal spending (on consumption and investment). And this brings us back to Mr. Lee's 5% to 7% projected growth range for 2002. (Jan 4, 2002)
… the obsession over the Central Bank's fed funds rate masks a more important shortfall in policy. Namely, the urgent need to pump more high-powered liquidity into the economy. … Turning back to the Fed, liquidity deflation will not end until year-to-year monetary-base growth increases by something like 10%. (March 21, 2001)

These selections are not isolated examples. One quarter of Mr. Kudlow's NRO columns written over the past two years, including four of his five columns in June, call for the Federal Reserve to print more money. Larry Kudlow has consistently used his position as National Review Online's economics editor to advocate printing of hundreds of billions of new dollars to cure America's economic woes. Free market luminaries such as Ludwig von Mises, Frederick Hayek, and Milton Friedman devoted large portions of their lives to refuting the belief that new money creates prosperity. This view has no place in the conservative community, and does not belong on NRO.

The recent history of American monetary policy and conservative economic thought demonstrate the absurdity believing that printing money improves the economy. Indeed, if the past century has taught economists anything, it is the truth of the quantity theory of money. Money only has value as a medium of exchange, and when the supply of money rises relative to the supply of goods and services in the economy, prices rise. From the Weimar Republic to post-war Japan, from the United States in the seventies to South America in the eighties, printing more money caused higher prices. It worked every time governments tried it. Until the late seventies, the Federal Reserve Board rejected the quantity theory of money, relying instead on Keynesian theories postulating that instability in the demand for and velocity of money allow the government to print vast amounts of money without substantially effecting the price level - theories that Mr. Kudlow also subscribes to. In the late sixties Milton Friedman reintroduced economists to the quantity theory of money, and supported it with exhaustive empirical evidence demonstrating both the link between money and prices and the stability of the velocity of money. Initially, the Federal Reserve Board refused to abandon its Keynesian theories, but reversed course after successive years of double digit inflation followed massive increases in the money supply in the seventies. Since the early eighties the Federal Reserve restrained the growth of the money supply, and since the early eighties inflation has not troubled the American economy.

The defeat of inflation across the globe is one of free market economics greatest triumphs in the past century. Not only the United States, but the European Union, most of South America, and many Asian states learned from Friedman and conquered high inflation by slowing the rate of growth of the money supply. Today, unlike the world of a quarter century ago, the economies of almost all developed nations are undisturbed by significant inflation. This triumph directly resulted from of central banks accepting and acting on the empirically proven quantity theory of money. Yet, despite these historical and economic facts, Mr. Kudlow seeks to abandon monetary restraint, and, in his words, "open the money spigots." National Review should not be used to promulgate such destructive theories.

In addition to its inflationary implications, Mr. Kudlow's stated rationale for rapidly expanding the money stock disturbingly echoes the philosophy of central planning. Again, I want to be clear, I believe that Larry Kudlow is neither a socialist nor a liberal, and his recommendations for regulatory and fiscal policies, especially his support for lower dividend taxes, demonstrate his strong commitment to free markets.

Unfortunately, these free market views do not extend to monetary policy. Mr. Kudlow argues for creating new money because he believes that businesses need the Federal Reserve to provide them with credit. He has contended that "… the Fed must provide enough cash to fund the new investment tax incentives just signed by President Bush," and explicitly stated that "the Fed injects credit into the financial system, and then the banks inject credit into the economy." Unfortunately, Mr. Kudlow does not recognize that the government cannot and should not attempt to create credit out of thin air. There is no such thing as a free lunch, and, as both Hayek and Friedman demonstrated, printing money is no exception.

The government cannot create credit by fiat, since credit represents a creditor giving up his use of real resources in the present so that a borrower can use those resources to fund his investment. Printing money does not create new resources, and thus provides no additional credit to invest in the economy. Rather, newly created money permits businesses to increase investment, but, spreading throughout the economy, raises prices and forces consumers to reduce their spending. When the government provides new credit to businesses by printing money, it forcibly reallocates resources from consumption spending to capital spending. No matter what window dressing Mr. Kudlow uses to disguise this reality, government printed credit represents central planning on a national scale. It is absurd to believe that the members of the Federal Reserve Board, no matter how intelligent, could possible know how much credit businesses require or the correct balance between consumer and capital goods in the economy. Only when the Federal Reserve shuts down the printing presses and allows interest rates to freely adjust can the free market determine the correct balance between investment and consumption spending. Only the market, not government, can generate that information in the form of freely adjusting interest rates. Mr. Kudlow's claims that the Federal Reserve must provide credit to fund the recovery are another way of saying that the government needs to intervene in the economy because free markets would not provide that credit. Such views are wholly incompatible with National Review's mission and purpose.

Mr. Kudlow justifies any inflation that results from an increased money supply by renaming it reflation and claiming that America needs the reflation to avoid deflation. Setting aside the reality that the American economy is not experiencing deflation at all, merely historically low levels of inflation, Mr. Kudlow ignores the fact not all types of deflation damage the economy. Deflation can result from either a decrease in the money supply or from improvements in technology and more efficient production. While a severe drop in the money supply can be just as damaging to the economy as a rapid increase, the Fed hasn't decreased the money supply. Instead, most deflationary pressures in the US stems from the lower cost of providing goods and services - the prices of commodities, as with the prices of all other goods and services, will drop in a free market if it becomes less expensive to produce them. The phenomenon of natural deflation resulting from increased productivity won't harm the economy, and does not justify turning the printing presses on high. The fact that it cost more to produce some commodities, goods, and services, in the past than it does today is no reason to "reflate" the currency.

Ideas have consequences. Mr. Kudlow's ideas have been tried in the past, and they lead only to inflation and economic stagnation. National Review Online influences the thinking of conservatives across America, and this prominent position makes it all the more important that NRO support free market policies that, if implemented, would strengthen America's economy. Larry Kudlow's support for reducing marginal taxes, and taxation of investment income, makes a valuable contribution to the conservative movement. His perpetual calls for dramatic increases in the money supply, his calls to "turn the money spigots wide open", do not, and they have no place in National Review or in any other conservative publication. I request that National Review Online cease publishing Larry Kudlow's columns that advocate expanding the money supply, and instead publish only those columns of his that support truly conservative economic policies.



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