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Explaining Paul Ryan’s Austrian approach to monetary policy

Paul Ryan’s expertise is in fiscal policy, not surprising given that he’s the chairman of the House Budget Committee. But what about his views on monetary policy? This from the Washington Post:

Like many other Republicans, he has repeatedly criticized Ben Bernanke’s efforts to stimulate the economy. But he has also gone further, arguing that the Federal Reserve shouldn’t be focused on reducing unemployment, period. And he has argued repeatedly for a “sound money” policy that has left some economists scratching their heads.

Perhaps Ryan’s most unconventional opinion on monetary policy came in the summer of 2010, when he told Ezra Klein that the Federal Reserve should actually raise interest rates even as the U.S. economy was still struggling: “[T]here’s a lot of capital parked out there, and we need to coax it out into the markets,” he said. “I think literally that if we raised the federal funds rate by a point, it would help push money into the economy, as right now, the safest play is to stay with the federal money and federal paper.”

This is not a common view.

Now Ryan later explained a bit more to Klein about what he meant:

Of course I do not think increasing the federal funds rate is what one does to spur immediate economic growth. But I do think we need to understand that the extremely accommodative monetary policy we have had for the past two years is not risk free. Observers like Kansas City Fed President Tom Hoening have made the case for a modest increase in the federal funds rate to send signals of monetary credibility, get back to normalcy and ward off speculative behavior (i.e., the next bubble).

Also – I’m not convinced – but intrigued – with the debate over the carry trade that is going on right now. What I mean by that is banks can borrow at essentially no cost from the Fed, plow the money back into no-risk Treasury securities, and earn that modest spread. This dynamic, while obviously helping banks recapitalize, could be curbing capital deployment in the private sector.

I’m intrigued – but not convinced – by this argument. I appreciate the opportunity to fully explain my point.

These comments led econ blogger Mark Thoma to call Ryan a “policy idiot.”  But actually what Ryan was talking about should sound quite familiar to proponents of an Austrian — as opposed to Keynesian — approach to monetary policy. Here is economics columnist Martin Hutchinson, an Austrian, for the Asia Times:

Monetary policy was successful in preventing the post-2008 recession turning into a repeat of 1929-33; by March 2009 the banks were already out of danger and liquidity was returning to the system. At that point interest rates should have been raised to more normal levels of perhaps 3-4% on the federal funds rate. That would have forced the banks to resume lending to small business, since they would no longer have been able to make risk-free profits by “gapping” between short-term and long-term rates.

At the same time, the recovery in US savings rates which we briefly saw after the 2008 crash would have strengthened, limiting the deterioration in the balance of payments that has de-capitalized the US economy and made US workers uncompetitive against those of emerging markets. Unemployment would have declined at the brisk rate of 1982-84, instead of the painfully slow rate of the past three years.

Shorter: Higher interest rates would have produced a stronger, more sustainable economic recovery. It’s a point of view not usually found in the New York Times or Washington Post. But it certainly has a following. But it sounds to me like Ryan’s views on monetary policy don’t go quite that far.

Also, here is what Ryan told me when I asked him late last year if the Federal Reserve should let inflation rise to help reduce U.S. indebtedness and boost nominal GDP growth:

Of course not. Are you kidding me? I know [Kenneth] Rogoff and these other people, [Greg] Mankiw, talk about that. Oh my gosh, that would be the worst … They think they can steer the car between the pylons going at a 110 miles an hour — and they can mop up any inflation at just the right point when it gets just a little too high. As if they can keep inflation to single digits because they can just fine tune the economy on dime. It’s never been done before, so what’s to think we can do that now?

4 thoughts on “Explaining Paul Ryan’s Austrian approach to monetary policy

  1. Austrians believe that the Fed is pointless, obstructionist, and better off dead. Ryan does not believe this, from what I can tell. Manipulation of interest rates by the Fed inefficiently allocates capital to places a legitimate market would not. After voting for TARP and the auto bailout, I think using ‘Austrian’ and ‘Paul Ryan’ in the same sentence is anathema.

    • I don’t have any idea of why he voted for the bailout. But as for TARP, wasn’t this sold as emergency measure? I wonder if he regrets that vote, somehow.

  2. Excellent article. Question: I’ve heard “tax cuts” described as a Keynesian measure. But doesn’t that depend on where the money comes from? Does the money come from individuals or from a state which collectively owns everything? The government seems to think that they own everything. And with the Obamacare ruling, government does own everything: all they have to do is call it a tax. Taxation w/o representation. Supreme Court blew it by rewriting the law to read “tax.” If Congress wanted “tax,” they should’ve written “tax.” They wrote “penalty.”

  3. The problem with raising rates through monetary policy causes the debt that the Treasury has piled on through fiscal policy to increase at a faster rate because of the higher interest rate. The funny money has gotten out of control, and the individuals that have concocted this shell game have no idea how to end this debt crisis. Printing more money is not the answer, it has not stabilized the housing market or employment. Rates have been at 0 for 4 years and nothing has changed, the little guy is suffering as usual while the government is clueless. The only asset class benefitting is the stock market and that is on low volume rallies with very little benefit to the middle class.

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