This Paul Ryan article from the Milwaukee-Wisconsin Journal Sentinel, Ryan leads opposition to Fed’s economic efforts, is scary if this is an accurate picture of the future of the Right on monetary policy (h/t Yglesias):
Ryan is regarded by many as a rising star in the GOP and a Republican point man on economic issues. The controversy allows him to showcase his fascination with the arcane business of central banking.
“Monetary policy was always my first love,” he said….
To Ryan, the root of the problem is the Fed’s dual mandate, which calls on the central bank to promote employment as well as throttle inflation. Ryan said he has pushed for years to rewrite the Fed’s statutes in favor of a single mandate to control inflation and preserve the dollar as a store of value, making the Fed more like the European Central Bank.
“Inflation is a killer of wealth. It wipes out the middle class. It eviscerates the standard of living for people who have retired or are living on fixed incomes. Name me a nation in history that has prospered by devaluing its currency.”
Is his argument that the Federal Reserve shouldn’t print money at all? Right now the Federal Reserve isn’t hitting either mandate, and it is far, far away from spurring inflation solely to get unemployment down. Projections have inflation at 1% through end of next year, which is far less than the (low) 2% that most Fed policymakers say is consistent with stable prices.
I know Paul Ryan is a Ayn Rand fan (I haven’t read it, so can someone confirm that in “
Gault’s Galt’s Gulch” gold is the only medium of exchange, that paper is worthless cause only a government backs it and all that goldbuggery stuff?), but is that kind of hard money deflation-worship the ultimate endgoal? Someone needs to ask Ryan if he also agrees with a return to the gold standard.
Separately, Arpit Gupta has a great post catching people up to the QEII debate (my bold):
As Christina Romer (former CEA Chair) has pointed out, the entire recovery the US had from the Great Depression can be accounted for by monetary stimulus — in particular, the decision to get off the Gold Standard (which removed a huge constraint on how much money we could print). Vockler generated a huge recovery in 1983 by loosening policy. And as recently as 2000-01, the Fed’s easing prevented what were actually quite enormous real economic losses (comparable to subprime losses) from turning into worse outcomes….
But even if you don’t buy that logic; clearly we can’t go on with the same money stock that existed, say, in 1913. We need more money from time to time, and that happens through two channels — (1) banks can do more lending, resulting in more privately generated money, or (2) the Fed can exchange bonds held by banks for cash, in effect giving banks a “licence” to print more money. In our system, the actual process of money generation actually happens through banks, but the government has a key role through monetary operations that allow or cancel what are in effect “money printing licences.”
Again — there really shouldn’t be any debate over this. We need to print money from time to time. This is especially important when there is an excess demand for money — at which point purely nominal changes can result in actual, large-scale effects in the economy…
Deflation is a bigger problem when it’s driven by shortfalls in demand…Deflation during times of economic stagnation is nothing short of catastrophic. The Japanese have been unable to generate enduring economic growth for, again, close to two decades now. High inflation is easy enough to end with central bank that cares about the issue — but deflation on Japanese lines is near impossible to cure. In my view, the massive costs of persisting in a Japan-like ditch are sufficiently large (and the odds that it will happen are high enough); suggesting that we should be prepared to pay a high premium for an insurance policy against such an outcome. Fortunately for us, this is really a negative premium considering the benefits that inflation closer to target would have for us today….
Finally, there’s the fact that while higher inflation is hardly a cure-all, the costs of having unprecdentedly low inflation right now make solving nearly every other problem in the economy much harder. It’s harder to rebalance global consumption (more savings in the US, more consumption elsewhere) while the dollar is strong. It’s harder to dig out of a housing debt overhang when inflation is lower than home buyers anticipated when they drew up contracts. It’s harder to deal with government debt if the Fed isn’t purchasing that debt. All of these are “real” economic problems, but they’re impossible to manage in the presence of deflation, and difficult enough when inflation is as low as it is….
Finally, I’ll say that for me, this issue is as much moral as it is purely practical. I was drawn to the bipartisan, technocrat economic management school not because of the patently unrealistic assumptions about human behavior, but because I saw it had real solutions to solve major economic problems. You don’t have to suffer a Great Depression — you just need to set your monetary policy correctly, etc.
Now, I’m worried that so many commentators have seemingly checked out of these debates. You see many people complaining about new policies, and worrying about supposed “risks” or “worries” that don’t exist in data coming in statistics or financial markets. There are fewer and fewer people with tangible solutions on how to solve this mess. I think that erodes the moral legitimacy of capitalism. I think no economic system that tolerates 10% unemployment is acceptable; and something must be done. If you don’t like QE; if you don’t like the alternate options here; then what’s your plan? What’s your strategy for avoiding a Japan death trap/Mad Max world? For Krugman and Bernanke, it was frustrating to watch policymakers in Japan seemingly self-destruct in the face of difficult economic times. Turns out it’s also frustrating to live in that world.
It’s all worth reading, but extra emphasis on the bold. Not hitting our stable prices inflation target is particularly killer for our current situation. Less than expected inflation rates for debt contracts frankly amounts to a giant transfer of wealth from debtors to the creditor class. (No wonder they are so excited to fight against doing anything. It’s only going to be a Mad Max world for those in the bottom 99%.)