How Sound is Ryan’s “Sound Money” Plan?

January 16th, 2011 at 11:31 pm | 11 Comments |

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Everyone knows Rep. Paul Ryan’s preferred fiscal policy: his Roadmap for America; but do you know what his preferred monetary policy is? If you scan Ryan’s opinion pieces and writing, you can find hints of it. We know he wants the Federal Reserve to not have a dual mandate and has denounced the typical metrics used by the Federal Reserve to measure inflation, such as the CPI. Most interestingly, he wants the Federal Reserve to set monetary policy from the price of a ”basket of commodities”. But is this a sensible policy prescription? Or a new gold standard?

Unlike Ryan’s other thoughts on monetary policy, he has not been as vocal about why he wants the Fed to follow the price of a basket of commodities, or which commodities he would want to follow and why. Ryan made his preference for this policy clear in two Wall Street Journal op-eds. In “Blame Congress for Inflation” (May 1, 2008) Ryan wrote:

[My] bill, called the Price Stability Act of 2008, allows the Fed to choose how it will put this single mandate into practice (my preference would be an explicit price rule anchored to a basket of commodities), as long as its overriding policy goal is to control inflation.

And in a piece titled “A Republican Road to Economic Recovery” (March 2nd, 2009):

I believe the best way to guarantee sound money is to use an explicit, market-based price guide, such as a basket of commodities, in setting monetary policy. A more politically realistic path to price stability would be for the Fed to explicitly embrace inflation targeting.

FrumForum contacted Ryan’s office for clarification of this policy preference, asking which commodities he thinks need to be in the basket and how Ryan would respond to criticisms of this policy? Ryan’s office responded by providing links to his op-ed, clarified that Ryan was not in favor of a gold standard, but was not been able to provide any additional information beyond that.

A commodities basket is not a gold standard. According to some economists, it is potentially more unstable. Gold standard advocates, by definition, want a system where the currency can be exchanged for a specified amount of gold. A commodities basket would involve tying the Federal Reserve to commodities beyond just gold. At the Chicago Mercantile exchange, the commodities traded range from metals such as gold and silver to soybeans and corn, as well as natural gas and oil.

A Federal Reserve that were to set monetary policy on the price of commodities would arguably be setting policy based on the demand for commodities in emerging economies, notably China.  David Beckworth, an economist at Texas State University explained to FrumForum that in addition to the price of commodities being largely determined by developing countries, the Fed would risk tying itself to prices that could change rapidly and on short notice. When demand among developing countries eventually subsided, it would alter the price of commodities: “for better or for worse, the political process can’t allow big swings in the monetary policy by outside forces.” It’s a fair question to ask why the United States and its service-based-economy, should have its monetary policy determined by the industrialization of China and other countries. One economist summarized that this policy would “imply that we would have to have consumer price deflation here in order to keep the dollar price of commodities stable.” There might indeed be a policy argument to justify that, but what is it?

A strict adherence to a commodities basket, or any tight rule of the sort Ryan proposes would have many of the same weaknesses as a gold standard and other hard money systems; it would restrict the Fed from being able to change or alter the money supply in the face of a crisis such as occurred in 2008. Some economists that FrumForum spoke to did suggest that adherence to a commodities basket might have prevented the crisis in the housing sector, but that it still would have ham-strung the Fed’s ability to respond to a similar crisis situation. One economist also wondered whether the focus on preventing a housing bubble is sufficient for the Fed’s operation, “would Ryan want the Federal Reserve to target housing prices since that is where the bubble was?”

When the policy was discussed with Lawrence H White of George Mason University, he saw ways in which this policy could be aimed at building coalitions among different hard money advocates: “Maybe he’s chosen this language to build a coalition between gold standard advocates and more mainstream price level targeting advocates.” There would certainly be a precedent for this, Ryan recently appeared at a panel advocating “sound money” which in turn issued a pamphlet written by an economist who has argued for the gold standard. Ryan has been very open in his admiration for former Republican Vice-Presidential candidate Jack Kemp, who was in turn an advocate for linking the dollar to gold.  Ryan has become a leading critic of the Federal Reserve because of his opposition to the Fed’s recent efforts at quantitative easing (“QE2″), lending an air of respectability to a cause that is usually taken up by the much more erratic and gadflyish Ron Paul.

Just what is Ryan’s full position on monetary policy besides his public calls to end the Fed’s dual mandate, as well as his oft-repeated argument that “there is nothing [more] insidious that a government can do to its countrymen, then debase its currency?”  These questions matter because Ryan isn’t just a leading member of his party as the chairman of the Budget Committee, he has also solidified his reputation as the “ideas man” of the Republican Congress. The Weekly Standard recently lauded Ryan for his intellect: “He’s become enormously influential because he knows so much more than his colleagues on a few issues.” (This is in addition to joking that he should run for President in 2012.)

There is no doubt that Ryan is a smart politician who is driven by a passionate interest in policy, but on a matter such as monetary policy, where his colleagues are likely to turn to him for guidance, it would be helpful to know exactly what policy he wants and why — especially if there could be some significant potential downsides to it.

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11 Comments so far ↓

  • balconesfault

    There’s the old saying … “elections have consequences”.

    In this case, ironically, the consequence for Ryan is that he won’t have the same kind of slack that he did before to be the wunderkind throwing out “brilliant economic solutions” that nobody was going to implement.

    Now … his party controls the House, and it might start turning his economic solutions into bills. They’d better have more clarity about exactly what that means. Ryan’s level of responsibility just jumped up a few notches.

  • Stan

    I agree with balconesfault on Ryan’s monetary policy problem, and I’d like to add that Ryan’s chances of implementing his health care insurance ideas are even weaker. He favors a variant of the Wyden-Bennett plan, i. e. he proposes phasing out employer provided health care by eliminating the present tax benefit to companies that offer subsidized medical insurance to their employees and then using the extra tax revenue to provide subsidies to individuals for buying their own insurance. Many economists liked Wyden-Bennett, but it has little backing in Congress because it would completely uproot our health insurance system. So I expect Ryan’s health care plan to quietly die.

  • rcthompson

    Ryan’s plan on its face is not bad, but it really depends on the commodities he wants to peg the standard to. We have had commodities bubbles in the past and could easily have them again in the future.

  • Watusie

    He voted for Medicare Part D – but now he wants to eliminate Medicare completely, and replace it with a program which imagines that private health insurers will provide good quality health care access to senior citizens for just $5,900/year. He says defense spending can’t be touched. He says he can eliminate the federal debt solely through spending cuts.

    Paul Ryan is a fraud.

  • lessadoabouteverything

    Noah is right, Ryan is a really intelligent guy, but that is also his problem, he doesn’t feel the need to truly learn the subject. His proposal is ridiculous. To screw around with our money supply all China would have to do is target, in turn, various commodities. Being that China has a few trillion US dollars lying around they could set our currency valuation at what they desire.

    And watusie is right, Ryan is a fraud. Take a look at this time schedule for Medicare vouchers, it will start in 10 years bypassing this current generation of seniors. But if it were a great idea, do it now, it is not like there are not millions of health insurance companies who could not take the vouchers. There is no way in hell Seniors would ever go for it, and without seniors there is no Republican party.

  • valkayec

    I’ve read Ryan’s Roadmap and find that it is totally unworkable. Not only would it not solve our fiscal problems but would exaggerate them as well as create an even deeper schism in our social fabric and community.

    I have no ideological stake in pegging the dollar to the gold, one way or the other, but as yet no one advocating this move has supplied answers to a couple of questions:

    1) How would doing so affect world markets and other denominations?
    2) How would the price be set? What measure would be used?
    3) How would manipulation of gold prices be controlled or prevented, especially since gold was greatly manipulated a few months ago in Europe causing a sudden price spike followed by a sudden decline? Some, who watch gold and silver and are close to that market, say the same in happening to silver as well.

    I would also like to ask the author of this article who are the anonymous economists are?

    As for Ryan, I suspect he’s not as deep an economic thinker as his fans would choose to admit. I’ve yet to see any article or interview, except one by Ezra Kline of WaPo, in which he fully articulated his ideas – and even that one interview indicated he lack the ability to see or voice the consequences – particularly the unintended – of his policy ideas. He’s either too ideological hidebound – Randian, supply side – or just naive.

  • Rob_654

    I agree with the other folks that Ryan now (like the rest of the Republicans) have to start adding specifics to their pronouncements. It is easy to sound brilliant when you can speak in generalities but once specifics start getting applied, well, suddenly the same brilliant person can look either out of their element or the gig is up and the emperor has no clothes.

    Regarding the commodities basket, I will be honest, I am not really sure what this means but based on what it appears to sort of sound like – will this basket be subject to political whims on what is in it and in what proportions, can this basket be changed to suit whatever is needed, will it be put in a proverbial “lock box” and untouchable regardless of what happens? If an emergency situation comes up and the commodities basket can be “overruled” who gets to decide what an emergency is and how far it back be taken?

    I think first let’s start with the Republicans laying out some huge budget cuts that they have been promising since Reagan (at least that is as far back as my voting memory goes) and let’s see if they have the guts to pony up those before we start going down some road that Ryan wants to take us down.

  • larry

    Ryan and econometrics? He doesn’t know an R-square from a t-test. A mock-serious autodidact. Laughable.

  • busboy33

    A bit off topic, but Terry set up a Yahoo Group for FrumForum posters to share contact data among themselves:

    http://groups.yahoo.com/group/frumforum/

    If this is a service you wanted to see on FF, this is a nice workaround for the site’s apparent inability to establish messaging or contact settings. Feel free to take advantage of it.

    . . . and good on Terry for taking the initative to doo all this.

  • Phony Gold Standard « LewRockwell.com Blog

    [...] Ryan is reviving the old, failed lie of a phony gold standard, beloved of an earlier Fed, and maybe a future one, [...]

  • Links « The Big Paul

    [...] Ryan’s “Sound Money” plan “sounds” like it was hatched by some nut in a shack in Montana. Sampling: [Ryan] wants the Federal Reserve to set monetary policy from the price of a ”basket of commodities”… A commodities basket is not a gold standard. According to some economists, it is potentially more unstable. [...]