Romney and Ryan don’t approve of fiscal policy stimulus (unless it’s tax cuts for the wealthy), and Ryan would take away the ability of the Fed to respond to unemployment as well. Basically, they are telling us that if a recession hits and they have their way, nothing will be done. Not a thing. No fiscal policy response (except perhaps austerity to make it worse), and no monetary response (except, if Ryan has his way, interest rate increases based upon a misunderstanding of how the economy works– that would also make things worse). So it wouldn’t just be the “you’re on your ownership society” of Randian dreams, Ryan would have monetary and fiscal authorities making things even worse than they already are.
Ryan is not a well-informed policy wonk with new, exciting ideas. He’s a policy idiot. Don’t let this guy anywhere near the policy levers.
Most of Thoma’s post is an excerpt from a longer post by Brad Plumer, What did Ayn Rand teach Paul Ryan about monetary policy?, which is from Ezra Klein’s Wonk Blog so you know it’s a non-partisan analysis (sarcasm alert).
I don’t know a lot about Paul Ryan’s views on monetary policy except a few things I’ve read along the way and what is contained in Plumer’s blog post which basically amounts to horror that Ryan wants to eliminate the Fed’s dual mandate. For that, apparently, Mark Thoma labels Mr. Ryan a “policy idiot”.
Well, I guess I’m a policy idiot too because I happen to share some of Mr. Ryan’s views on economic policy. In fact, I would venture to say that the dual mandate has caused or contributed to many of the economic problems which distress Mr. Thoma the most. I know that inequality is something he has lamented frequently in the past and I don’t think I’m the only one who believes that discretionary monetary policy has had a profound effect in that area. In fact, here’s a new paper from that fount of right wing thought, UC Berkeley, on exactly that subject. The conclusion of that paper, that it is monetary contractions which increase inequality, is at odds with previous papers on the subject but it would seem to support the idea that discretionary monetary policy is the root of the problem. If it is the contraction phase of monetary policy that reveals the inequality it is the prior inflation that makes the contraction necessary (in the eyes of the Fed to meet its inflation mandate).
I also happen to agree with Ryan and Romney’s opposition to government spending as the preferred method of fiscal stimulus. I suppose it is possible that Ryan and Romney’s views are solely a result of their desire to increase the after tax income of their rich contributors but certainly they aren’t alone in their opposition to government spending as stimulus. I oppose it because it has been shown repeatedly to be ineffective, as have temporary changes in the tax code. Crony capitalism whether practiced by Republicans or Democrats – and there has never been a government spending program to my knowledge that was not bedeviled by such corruption – just doesn’t create permanent or efficient growth. That doesn’t mean there aren’t ways for government spending to be effective in raising the productivity of the economy – well planned infrastructure for instance – but as a “stimulus” rapidly deployed to combat recession, it just hasn’t worked that well. By contrast, there is ample research that validates permanent changes in the tax code as the more efficient and timely stimulus. By the way, crony capitalism in all its glorious forms, is also aided and abetted by discretionary monetary policy. In fact, one might say that the Federal Reserve is the very Fountainhead of crony capitalism. But I digress.
I don’t know whether Mr. Ryan’s views on monetary policy are really informed by Atlas Shrugged. Maybe they are. But a lot of us out here believe that monetary policy as it has been practiced since the end of Bretton Woods and since the 1979 Humphrey-Hawkins bill is a big contributor to our current economic woes. And while I’ve read Atlas Shrugged – I like to think of it as my first romance novel and not a very good one at that – it is not the source of my views on monetary policy. Calling Mr. Ryan and everyone else who holds similar views idiots is not only not very nice, but it also will not solve our very real monetary problems. Having read Mr. Thoma’s work for a while, I’ll just chalk it up to having a bad day since I know he’s an intelligent and thoughtful economist.
Rather than engage in name calling, we should be having a serious debate about how to conduct monetary policy in a way that is fair to all Americans. The problem with the dual mandate is that the Fed simply cannot hit two targets with one policy regime. Proof is available in the current unemployment and inflation statistics. Now, maybe Mr. Thoma believes we should just raise the inflation target for a while to hit the employment target, but then that isn’t really adhering to the dual mandate is it? That is just saying that the employment target is the more important of the two. And getting that inflation genie back in the bottle is probably not as easy as Mr. Thoma and others presume. Furthermore, if that UC Berkeley paper is correct, the future monetary contraction required to get back to the Fed’s inflation target would further exacerbate the inequality problem as well. Unless, Mr. Thoma would like to permanently raise the inflation target which of course wouldn’t be very good for poor folks either.
Monetary policy can hit just about any nominal target it chooses but that doesn’t make it desirable. The Fed chose inflation targeting for the last several decades and has done an admirable job of hitting the target with some short term deviations. The result was also a fairly stable expansion of real GDP and employment until recently, at least using the chosen measure of inflation, but as we’ve discovered over the last few years there were some pretty serious distortions that came along with that great moderation. The rapid rise in the dollar index in the late 90s and the subsequent fall from 2002 to 2008 would seem to be evidence that inflation targeting did not yield the desired stable purchasing power for the dollar which monetary policy should provide. The large drop and then rise in the price of commodities, especially gold and oil, would also seem to validate that observation. If policy from 2002 to 2008 was inflationary despite a stable consumer inflation rate (as measured by the Fed’s preferred method) then there is something wrong with how we are measuring inflation. In other words, we chose the wrong target.
Any monetary policy that concentrates on a flawed measure of inflation is doomed to failure. There are numerous market based indicators of the value of the dollar and monetary policy needs to consider them all. Cross currency exchange rates matter, commodity prices matter, asset prices matter and yes, consumer prices matter too. A serious debate on monetary policy must address exchange rates, capital flows and asset prices. Commodity prices are part of that equation too as Mr. Ryan seems to understand. Employment is a result of getting both monetary and fiscal policy right. If fiscal and regulatory policy is a mess – and it is – and the politicians won’t fix it, you can’t just substitute monetary policy in its stead. Employment is not a nominal variable the Fed can hit except in a short term, temporary fashion. And in trying to do so, as the housing bubble and subsequent collapse demonstrates, the Fed causes an entirely different set of problems that eventually destroys even more jobs.
What we need to be doing is having a global discussion about monetary policy as we did after WWII at Bretton Woods. Floating exchange rates, free trade and activist central banks are a toxic mix that affects the global economy, not just the US. We need to decide how to stabilize the purchasing power of the dollar not just in relation to US consumer prices but also in relation to real assets (a commodity basket, gold, real estate) and foreign currencies. We need to decide how to minimize disruptive capital flows which directly impact the efficacy of domestic monetary policy in all countries. Monetary policy can only do so much in regard to employment and other real variables. Any undesirable fluctuations in the face of properly stabilized monetary policy fall within the purview of fiscal and regulatory policy. We should also realize (remember?) that economies will have periods of fluctuation due to natural disruptive changes that monetary policy cannot repair. In a dynamic economy, entrepreneurs will disrupt the status quo and adjustments in the economy and labor markets do not happen instantaneously.
Monetary policy deserves a serious debate and if Mr. Ryan’s reading of Ayn Rand helps to advance that cause, I couldn’t care less. He isn’t being nominated for Chairman of the Federal Reserve. When was the last time a Vice President had a significant impact on monetary or fiscal policy? He may not have the right answers – most politicians don’t – but at least he’s willing to engage in a debate. Let’s end the name calling and get serious.