Paul Ryan's Views on Monetary Policy

One wrinkle of Paul Ryan’s joining Mitt Romney on the Republican ticket is that Ryan’s views in one area, namely the budget and debt, are very well known and have been debated endlessly in Washington, while others are relatively mysterious.

So now that he’s left Budget Committee business to take on the broader portfolio that comes with being part of a national campaign, Ryan is going to face questions about issues he may not have previously had to worry about.

Mark Thoma, a professor of economics at the University of Oregon and a prolific blogger, draws attention to Ryan’s past statements on monetary policy, calling them “clownish,” and “nutty.” What’s known of Ryan’s views on the Federal Reserve and money mostly consists of Ryan’s repeated calls for “sound money,” a 2009 Wall Street Journal op-ed that advocated inflation targeting, and a short 2008 bill that would limit the Fed’s mandate to focusing solely on price stability. In other words, more or less boilerplate Republican ideas on monetary policy.

What Thoma found so unimpressive about Ryan’s thin resume on monetary policy is that it appears that the Fed wouldn’t have lowered interest rates before and during the recession if Ryan had had his way. Thoma, and probably most other macroeconomists, would argue that raising rates out of a vague preference for “sound money” and fear of inflation during this current downturn would have made the situation worse. Furthermore, Thoma writes, by removing the Fed’s mandate to address unemployment, “Ryan would take away the ability of the Fed to respond to unemployment as well. Basically, they are telling us that if a recession hits and they have their way, nothing will be done. Not a thing.”

Thoma’s criticism is worth noting because monetary policy is far more important than the public realizes. The economy and jobs outlook top polls of voters’ concerns. The Federal Reserve’s decisions about the money supply bear on the short-term economic situation more than any of Ryan’s budget proposals.

While monetary policy is key, though, Ryan’s preferences are not as relevant as might be thought on first glance, nor as ominous as Thoma thinks. The simple fact is that the Fed conducts monetary policy independently of the executive branch. Fed chair Ben Bernanke controls the money supply, not Barack Obama – and certainly not Joe Biden. True, the president does nominate the Fed chair and governors. But otherwise, their decisions are beyond his influence, and the vice president isn’t involved in the process.

As far as Ryan’s ideas go, though, it’s worth noting that his expressed favorite rule for monetary policy would, if instituted immediately, mean more monetary stimulus than there has been today. His bill doesn’t specify what inflation target he’d ask the Fed to adopt, but let’s assume that it would be 2 percent yearly inflation. That’s a fair assumption, because 2 percent the Fed’s current implicit target and the favored target of many inflation target advocates. Currently, the 10-year expected inflation is 1.26 percent. If the Fed had a single mandate to keep inflation at 2 percent, that expectation would go up – meaning that businesses would expect looser money in the medium term.

It’s also worth noting that Ryan may not be all that far from President Obama in his attitudes toward the Fed. Ron Suskind reported in his book Confidence Men that Obama believed that the lack of jobs was due not to a shortfall of aggregate demand but to productivity gains that had left many workers redundant. Of course, that interpretation of the recession’s aftermath mostly undermines the case for monetary stimulus, which is intended to boost aggregate demand. But it’s not an unsupportable theory. In fact, it’s one shared by the prominent liberal economist and Nobel Prize-winner Joseph Stiglitz. Stiglitz, although left-wing, is a skeptic of further money stimulus.

In terms of how they would affect monetary policy, then, a President Ryan might not be too different from President Obama. Obama, after all, hasn’t distanced himself much from George W. Bush: they both nominated Ben Bernanke as Fed chief.