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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