But some critics are sick and tired of the Fed prioritizing job creation at the risk of rising prices. They say the juggling act of promoting economic growth while staving off inflation has proven ineffective, and has led to a policy of too much cheap money with dangerous consequences for the economy. "The American people have been witness to an era of unprecedented borrowing and spending by the national government," Rep. Mike Pence, a Republican from Indiana, told CNNMoney Thursday. "I know that the Fed can't spend us back to prosperity." … "The Fed can print money, but they can't print jobs," he said. "Printing money is no substitute for sound fiscal policy and we ought to be looking to the Congress to embrace the kind of policies that will get this economy moving again."
Maybe QE2 has confused the Senator but the Federal Reserve is not practicing fiscal policy in the sense of increasing the Federal deficit. On this claim that expansionary aggregate demand policy cannot reduce the output gap, Paul Krugman today reminded us of something he wrote last summer:
What’s odd, though, is how little talk there is about the way the 70s ended — which I viewed at the time, and still do, as a huge vindication of Keynesianism. Here’s what happened: the Fed decided to squeeze inflation out of the system through a monetary contraction.
Paul continues by nothing that the new classical theory that apparently Pence believes it predicted we would not have a prolonged recession during the early 1980’s. We did. This same theory would hold that our current Great Recession is not happening at all. I hate to say this – but this Congressman is clueless on a couple of macroeconomic fronts.