Rep. Ryan: Repeal Humphrey-Hawkins

GOP Representative Paul Ryan of Wisconsin penned an interesting op-ed for the Wall Street Journal yesterday: "Blame Congress for Inflation". He is writing legislation that would repeal the  Humphrey-Hawkins Full Employment Act of 1978, which imposed the prevailing ‘dual mandate’ on the Federal Reserve–to ensure long term price stability (or said another way, to ensure the long term value of the dollar) AND short-term economic growth (a/k/a to support ‘full employment’). Unfortunately, those two goals are not always compatible, and the latter is almost always the more politically expedient objective, especially in the eyes of Congress. Ryan wrote:

Price stability is a basic necessity of long-term prosperity. And, with monetary policy under its jurisdiction, the Fed is the only institution capable of stabilizing prices.

That last assertion is not entirely correct–the European Central Bank and The Bank of Japan also play a critical role in setting the price of globally traded goods, and thus have an impact on other nation’s price levels, including our own–but it’s closer than most politicians ever get. It’s also a courageous issue for a legislator to stick their neck out on. His proposal should probably be viewed as a competitive response to the fact that, after almost 100 years, the U.S. dollar and Federal Reserve face meaningful competition for the first time, in the form of the Euro and the European Central Bank. Notably, the ECB is committed solely to price stability.

Ryan then touches, fleetingly, on the critical aspect of price stability that continues to be overlooked by most commentators–taxes:

…negative outcomes are not the intention of Fed policy. Mr. Bernanke has been dealt a bad hand – a slowing economy and upward pressure on prices – and he is trying to win on both ends. But Congress, too, is accountable in this…Congress is already threatening the economic climate by dangling the prospect of huge tax increases ($683 billion in the House-passed budget) and sharply higher spending. There is no sign that Congress will change its tune on fiscal affairs – but passing the Price Stability Act is a chance at a bipartisan commitment to sound money.

The state of the real domestic economy, and the non-monetary policy measures that impact it, should not be overlooked when considering the appropriate objective for monetary policy. For example, when the Bank of England was the steward of the world’s monetary standard from roughly 1821 to 1913, its primary objective was price (i.e., monetary) stability. That did indeed support long term investment and risk taking, globally. But it also prevented the Bank from supporting the domestic economy of England in hard times by lowering the cost of credit. Whatever factors were impacting the domestic economy–technological innovation, demographics, social upheaval, or most commonly, political errors like higher taxes, regulations, and tariffs–the Bank of England was required to look the other way, keeping its eye only on global price stability. To preserve such an arrangement, political bodies with the power to tax, regulate, and set trade policy had to be more economically savvy and behave in ways that were sensitive to the situation of the domestic economy, and its competitive state relative to other parts of the world. The current Congress demonstrates little of this awareness, which means that Ryan’s proposal would not come without tradeoffs.

Like many other commentators advocating a stronger dollar, Ryan is on the right track. But by not hitting the issue of America’s declining economic competitiveness (and the looming problem of higher taxes, trade barriers, and entitlement burdens) just as hard, he is advocating a prescription that may or may not be better than a bout of mild stagflation. Our political history clearly demonstrates that, when meaningful political relief for the real economy is not forthcoming, the U.S. electorate will accept policies that eventually inflate a good deal of its economic burdens away…whatever the rest of the world may think.

The rise of the Euro and the ECB is making this approach to economic affairs less and less feasible, which means it’s time for Congress to get back to policy making that enhances the expected long-term performance of the U.S. economy. It has done so in the past, in the 1960s, the late 1970s to the mid 1980s, and the late 1990s. In all of these periods, the Federal Reserve was freed up to focus on price stability. Without a return to pro-growth policies from Congress, Ryan’s bill is almost sure to fail.