JONATHAN CHAIT JANUARY 23, 2011
[Guest post by Noam Scheiber:]
We've all heard that Republican ideas man Paul Ryan--who's slated to give the GOP response to the State of the Union--has some deep thoughts on how to save the country from fiscal ruin. (Though, alas, not everyone understands that these ideas are spectacularly vague and substantively dodgy.)
Less well known is that Ryan has some equally dodgy ideas about monetary policy. FrumForum's Noah Kristula-Green unpacked them last week:
[H]e 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. 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.”
P.S. Kristula-Green also flags some interesting thoughts on the gold standard from my favorite monetary economist, Bill Kristol. (Er, make that second favorite monetary economist.) It turns out The Weekly Standard was against the gold standard before it was for it. I wonder what could possibly explain the change of heart.