Representative Paul Ryan continues to push for contractionary fiscal policy, with the addition today of contractionary monetary policy on top of that. Thankfully, The Economist has a nice entry on why this is a Bad Idea:
The spending cuts Republicans seek for this year and next would not doom the American economy to disaster, but they would place a meaningful drag on a recovery that continues to chug along at or just under trend growth, and that's risky. The literature suggesting that austerity can be expansionary has faced a great deal of criticism, and that literature itself suggests that expansionary austerity is most likely when interest rates are high—which they aren't—and when the currency is allowed to depreciate considerably—which Mr Ryan opposes. Short-term spending cuts are unambiguously contractionary, and Mr Ryan wants them in spades.
Now, if that weren't bad enough, he's pushing for much tighter monetary policy, at a time when core inflation is barely pushing the needle:
And then there's the money issue. It wasn't so long ago that both parties supported countercyclical monetary policy. Top economists from across the ideological spectrum—from Milton Friedman to Christina Romer—point to tight monetary policy as a major factor exacerbating and prolonging the Great Depression. Mr Ryan claims he's worried about inflation. But based on what markets are saying, 10-year expected inflation is just 1.94%. That is, according to the Cleveland Fed, "the public currently expects the inflation rate to be less than 2 percent on average over the next decade". Mr Ryan said that he wished the Fed would drop its mandate for full employment and focus on price stability. Well, current inflation expectations indicate that tighter policy would maintain inflation below the Fed's implicit target of around 2%, which is the level of inflation most rich-country central banks have decided is conducive to stable prices and growth. Moreover, Mr Ryan's suggestion that high inflation is imminent cuts directly against the prevailing market view. That's a fine belief to have, provided you aren't spending your time arguing that markets know best and need to be free to guide the economy.
It seems to me that Ryan is simply calling for tighter policy in an effort to take advantage of rising gas prices, since many associate any price increases in gas with 1970s style stagflation. However, the price of crude collapsed today, in what turned out to be a record sell-off:
Crude oil plunged 10 percent as startled investors unloaded their positions and a weeklong decline accelerated into an outright freefall. The price of U.S. crude went from triple digits to double digits, falling below $100 after opening at close to $110. Brent crude, a European benchmark, lost $12 at one point in a sell-off that exceeded the one following Lehman Brothers' collapse, Reuters reported.
So, my question is: how much longer can the hysteria over inflation last if there's... no inflation?
The spending cuts Republicans seek for this year and next would not doom the American economy to disaster, but they would place a meaningful drag on a recovery that continues to chug along at or just under trend growth, and that's risky. The literature suggesting that austerity can be expansionary has faced a great deal of criticism, and that literature itself suggests that expansionary austerity is most likely when interest rates are high—which they aren't—and when the currency is allowed to depreciate considerably—which Mr Ryan opposes. Short-term spending cuts are unambiguously contractionary, and Mr Ryan wants them in spades.
Now, if that weren't bad enough, he's pushing for much tighter monetary policy, at a time when core inflation is barely pushing the needle:
And then there's the money issue. It wasn't so long ago that both parties supported countercyclical monetary policy. Top economists from across the ideological spectrum—from Milton Friedman to Christina Romer—point to tight monetary policy as a major factor exacerbating and prolonging the Great Depression. Mr Ryan claims he's worried about inflation. But based on what markets are saying, 10-year expected inflation is just 1.94%. That is, according to the Cleveland Fed, "the public currently expects the inflation rate to be less than 2 percent on average over the next decade". Mr Ryan said that he wished the Fed would drop its mandate for full employment and focus on price stability. Well, current inflation expectations indicate that tighter policy would maintain inflation below the Fed's implicit target of around 2%, which is the level of inflation most rich-country central banks have decided is conducive to stable prices and growth. Moreover, Mr Ryan's suggestion that high inflation is imminent cuts directly against the prevailing market view. That's a fine belief to have, provided you aren't spending your time arguing that markets know best and need to be free to guide the economy.
It seems to me that Ryan is simply calling for tighter policy in an effort to take advantage of rising gas prices, since many associate any price increases in gas with 1970s style stagflation. However, the price of crude collapsed today, in what turned out to be a record sell-off:
Crude oil plunged 10 percent as startled investors unloaded their positions and a weeklong decline accelerated into an outright freefall. The price of U.S. crude went from triple digits to double digits, falling below $100 after opening at close to $110. Brent crude, a European benchmark, lost $12 at one point in a sell-off that exceeded the one following Lehman Brothers' collapse, Reuters reported.
So, my question is: how much longer can the hysteria over inflation last if there's... no inflation?