Most commentary on the House GOP “budget” released today has focused on its not-very-budget-like lack of actual budget estimates. How much money would they have the government spend? And on what? And how much revenue would the government take in after their tax changes? Such questions are not addressed. However, another point of interest in the “plan” is that it stakes out some fairly radical positions on monetary policy near the end. They condemn the Fed’s current quantitative easing strategy and, somewhat confusingly, specifically urge the Fed to stop doing this on the grounds that listening to the Republicans is necessary to preserve the Fed’s independence. They “support a requirement that the Fed establish some numerical definition for price stability and maintain that policy.” And most strikingly of all for a party that mostly defines itself in opposition to the dread specter of Europe these days, they want the Fed to abandon its current generalized prosperity mandate in favor of a European Central Bank-style pure inflation target:
In addition, Republicans support amending the Humphrey-Hawkins Full Employment Act, which currently diverts the Fed’s attention from long-term price stability to short-term economic growth. In an effort to fuel the economy, this additional mandate has encouraged the Fed to keep rates artificially low, contributing to the present crisis and a loss in public confidence of the institution.
If you want to make a serious inquiry into the roots of persistently high unemployment in many European states relative to the United States, one great place to start would be in the policy difference that the GOP wants to eliminate here. The European Central Bank has no mandate to concern itself with keeping unemployment low. Consequently, unemployment is generally not low.
Meanwhile, to put these concerns in context it’s worth observing that we haven’t actually had a Democratic Fed chair in over 20 years and that the last one we did have is known as the man who finally whipped the inflation of the 1970s. But Alan Greenspan and Ben Bernanke are hardly left-wingers. They’re both people with views of monetary policy grounded firmly in mainstream economic thinking, with political views grounded firmly on the right. Before Bernanke was put in charge of the Fed by George W. Bush, he was chairing Bush’s Council of Economic Advisers. I think it’s nice that the GOP has decided, in at least one respect, that the “more Bushism” approach isn’t the way to go, but it’s a bit odd that they’ve decided that we need to go in a much more conservative direction.