Paul Ryan and John Taylor: it's time to stop expecting the Fed to do the economic growth work we should be doing ourselves

Ryan Streeter

Congressman Paul Ryan teams up with Stanford’s John Taylor in today’s IBD to propose reforming the Fed. The occasion is the recent round of quantitative easing, or QE2, that has come under fire from a number of Republicans of late. 

The Fed’s decision to purchase $600 billion in Treasury securities has excited a healthy round of criticism from a number of Republicans. Inflation and a devalued currency are a lot to worry about, especially if they are accompanied by continued unemployment and stagnation - as has been the case since last year’s QE1, or first round of quantitative easing.

Ryan and Taylor’s main thesis is that the Fed needs to return to a rules-based approach to monetary policy rather than its current discretionary habit, which politicizes the bank, harms its independence, and ultimately leads it in contradictory directions.  In sum:

1. QE2 is part of the family of “sugar high economics” that got us into our economic mess in the first place. Money sloshing around without the necessary underpinnings of prosperity – lower and better taxes, predictability in regulation, restraint in spending – has already been discredited. Why try it again?
2. As QE2 is the purchase of Treasury securities, it “looks an awful lot like an attempt to bail out fiscal policy.” QE2 builds upon QE1’s venture into areas of fiscal policy that are outside of its mandate and more properly the domain of Congress.
3. In order to fix this trend, Congress should remove the Fed’s full employment mandate and get it back to its primary purpose of price stability through sound monetary policy. Congressman Mike Pence called for this in his Detroit speech earlier this week, too, and it seems to be an idea gaining some traction.
4. The Fed needs to get back to a rule-based strategy, which “should include, among other things: greater simplicity; a description of interest-rate responses to economic developments including how the Fed will achieve those responses through money growth; and greater attention to commodity prices, including food and energy, as opposed to a myopic overemphasis on core inflation.”

Ryan is smart to team up with credible public intellects such as Taylor, who was one of the first and most forceful commentators on the role of government policy in creating the conditions of the 2008 economic meltdown.  Ryan doesn’t need leading public intellects to help him make his arguments, as he is already well-regarded for his sharp mind, but he’s demonstrating a keen insight by doing so: important reforms need justification in the broader community of ideas (this isn’t the first time Ryan has done this; he teamed up recently with AEI president Arthur Brooks, a highly respected social scientist in his own right, in a much-discussed Washington Post column).

Other Republicans should follow his lead, especially with regard to adding strong, reasoned force to the main point of his and Taylor’s column:  reforming the Fed isn’t just about preventing more rounds of quantitative easing in the future, it’s about economic growth.

We have quickly grown too used to the idea that the Fed should bail us out of the economic messes we have created through unreformed tax codes, bad regulations, and an addiction to spending. By clarifying and limiting the Fed’s mission, we force ourselves and our elected officials to get serious about enacting the kinds of pro-growth reforms we need. Paul Ryan is a welcome leader in that effort. We need a broader chorus of voices to join him.