Last week, Federal Reserve Chairman Ben Bernanke announced his institution would launch a third round of quantitative easing — the monetary stimulus the Fed has used intermittently to boost the economy since 2008 — in an effort to finally fulfill the “reduce unemployment” half of the Fed’s dual mandate. In response, Vice Presidential Candidate Paul Ryan denounced the move as “sugar high economics” and repeated to the Christian Broadcasting Network his assertion that “the costs outweigh the benefits” of QE:
I’m not a fan of QE3. I wasn’t a fan of QE2 either. I think in the long run it will do more harm than good. But what this is is it’s the Federal Reserve and the monetary policy trying to bail out the fact that we have terrible leadership on fiscal policy from President Obama…
I fear that it undermines the ultimate credibility of our currency, of our money and you need to have sound money. It’s a necessary pre-condition for economic growth. We have loose money already so it’s not a question of having too tight of a monetary policy. We have exceptionally loose monetary policy… This kind of easing hurts savers, questions the credibility of our currency, and I think ultimately the costs outweigh the benefits.
ThinkProgress already reported on the problems in Paul Ryan’s cost/benefit analysis: Inflation remains at a near-historic low of 2 percent — far below the 12 percent inflation of the 1970s — while unemployment is still at 8 percent. The Fed’s interest rates have nowhere to go but up, meaning inflation could be easily reined in if it began to dangerously rise.
Bernanke himself has already estimated the initial rounds of QE created as many as 2 million jobs. And the “savers” that Ryan says could be hurt are in fact a very narrow group, according to Dean Baker of the Center for Economic and Policy Research: “Realistically there are not a lot of people who both have substantial savings (enough that the interest makes up a big share of their income) and who kept it exclusively in short-term assets… The winners from a policy to boost growth through lower interest rates vastly outnumber the losers.”
Ryan’s claim that monetary policy is already “exceptionally loose” is also questionable. Milton Friedman, the 20th century economist beloved by many conservatives, argued that interest rates are actually poor indicators of monetary policy. Better indicators are inflation and nominal GDP growth, a view with which Bernanke has concurred. Both the inflation and NGDP growth trends suggest monetary policy is actually too tight.
Ryan is certainly right that monetary stimulus is a second-best option for boosting the economy after better fiscal policy. But the international and domestic evidence shows that Ryan’s preferred fiscal policy would drive the economy further into the ground. Meanwhile, the Republicans’ control of the House and their filibuster in the Senate have enabled them to torpedo fiscal policy that would actually help.