Coming out of their 2012 electoral debacle, Republicans hit the ground running in 2013 with two big ideas, balanced budgets and adamantium-hard money. I’ve blogged against balancing the budget in ten years and a balanced budget amendment.
Now let me take a crack at The Sound Dollar Act of Rep. Kevin Brady, a Texas Republican. His proposal would give the Federal Reserve a single mandate: price stability. What’s more, he gives the mandate an unneeded Austrian flavor by having the Fed monitor asset prices as well as prices for goods and services. A Wall Street Journal op-ed today by Seth Lipsky touts the legislation.
Now, I am all for rules-based monetary policy and a single goal mandate. Unfortunately, Brady’s Sound Dollar Act would make for unsound, liquidationist monetary policy. It would risk a repeat of the Great Depression and Great Recession, two economic catastrophes where an overly tight Fed played a central role. (See: ECB and EU debt crisis.) In fact, my AEI event last Friday, “Mend it, don’t end it: Revamping the Fed for the 21st century” argues exactly against this sort of approach in favor of the Fed ensuring macroeconomic stability by targeting the level of nominal GDP. And here is a brief summary.