Amity Shlaes‘ latest Forbes column urges policymakers to think big in pursuing monetary reform.
[T]he Fed’s quantitative easing has something to do with poor employment. Discretionary monetary policy terrifies employers. Investment officers fear inflation. It’s too difficult to separate fiscal and regulatory policy. And none of this can be sorted out without reform. For current law mandates that the Fed oversee both money levels and the general economy.
John Taylor, professor of economics at Stanford, backs the Federal Reserve Accountability and Transparency Act of 2014, which would require the Federal Open Market Committee to follow a clear policy rule. A good start, but it’s time to think bigger. It’s time to disentangle the Fed’s job, which is handling the money, from Congress’ or the states’ job, which is serving the economy generally. Then, at least, we could all better evaluate which policies cause what. The Sound Dollar Act sponsored by Congressman Kevin Brady (R-Tex.) calls for one—and only one—mandate for the Fed: managing the price level.
Once isolated, monetary policy would be easier to study and to improve. Perhaps there’s no such thing as benign inflation. “At its heart, money implies a commitment of value,” economist Robert Barro said in the 1980s. “But discretion in monetary policy implies no commitments.” In any case, mystification is part of the problem. A monetary policy that works can be understood by all. Let economists invite some historians into the reform process. Looking back further, one can see that wicked inflation can follow “benign” expansion. In the 1970s everyone blamed instability in the Middle East for spikes in the price of oil. Only later did officials allow that oil prices had also expressed significant inflation. During World War I authorities inflated but didn’t admit to doing so. They blamed later price increases on demand, gouging merchants and supply-chain issues. Sound familiar?
Calvin Coolidge, as governor of Massachusetts, fired patrolmen who went on strike. The governor failed to consider sufficiently what had made the policemen so desperate: They couldn’t support their families. Later, when he was vice president, Coolidge reconsidered and concluded: “Inflation is repudiation.” What a strong motto for Reform 2015.
