Fight of the Century: Sarah Palin vs. the Federal Reserve

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Sarah Palin spoke before a trade association in Phoenix today about the US central bank's plan to buy $600 billion in Treasuries in the hopes of lowering interest rates and -- just maybe! -- raising inflation expectations. Pause for a moment. Sarah Palin on the Federal Reserve is one of those immortal phrases, like Lindsay Lohan stars in Anna Karenina, or La Boheme featuring Justin Bieber, a magical, irresistible blend of high and low that might just make mainstream Americans care about monetary policy. So what did she say -- and more importantly, what should we think about it?

In a nutshell, the Fed wants three things to happen. It wants banks to lend more with easy money, families to borrow more with low interest rates, and consumers to buy more today with the expectation that prices will rise tomorrow. Palin said the Fed's plan would raise inflation, weaken the dollar, and hurt the country. She's right about the first two and wrong (probably) about the third.

Let's look at inflation. Wall Street Journal reporter Sudeep Reddy smartly pushed back on Palin's statement that "[grocery] prices have risen significantly over the past year or so." Reddy noted that food and beverage price inflation was actually growing at the slowest pace on record. Palin countered on Facebook, upbraiding Reddy for not reading the WSJ on grocery stores faced with higher food costs. Who's right?

It's true that food prices are rising faster than overall inflation, due to higher demand for meat in emerging nations and lower supply of grain, partly due to a drought in Russia. But this is after the tamest year of food pricing in decades, which is the clear result of high unemployment, weak US demand, and ubiquitous discounts to draw shoppers.

If the United States faces an inflation crisis, it is, if you'd believe it, a crisis of low inflation. That's good for folks with steady income, like Sarah Palin, but it's not good for people out of work, because low inflation is a measure of a cool economy that is under-producing goods and services that should be generating millions more jobs a year. The upshot is: Sarah Palin is correct that the Fed might raise inflation, but we should want inflation to rise moderately over the next few months, after it fell into dangerous sub-2 percent territory in the summer.

Now, about that cheaper dollar. It's true that foreign countries are upset that the Fed plan might weaken the greenback. But that's partly because those countries' trade strategy relies on a strong dollar prop up their surpluses. Nobody wants to start a trade war in a weak global economy. But a weak dollar that begins to reduce our trade deficit by making some of our products more competitive overseas is probably a desirable side-effect of the Fed's move.

We don't know if the next Fed purchases will help, hurt, or do nothing, since they'll probably only move medium term interest rates by a few basis points, anyway. But Palin's conclusion that "the only way we can get our economy back on the right track" is to take our foot of the accelerator and cut spending relies on an economic theory that has no successful historical precedent that is relevant to the United States. Every country that rode "austerity" to recovery cut spending and used outside demand to boost exports. We don't have the option of instantly tripling our exports. So we have to get creative.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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