Analysis: An Economic Perspective of Rand Paul – Monetary Policy

Rand_Paul_official_portrait_with_flag_editContinuing in Insider’s evaluation of Rand Paul’s economic policy, this week we are evaluating his monetary policy – the control over the supply of money in the United States.

Monetary policy is a somewhat arcane (and unappreciated) role of the government. However, Sen. Paul’s views are particularly noteworthy for their extreme heterodoxy.

Paul, much like his father, is an avid supporter of auditing the Federal Reserve. He says, “I believe the Fed should be audited and the regulatory power should be placed back under the control of Congress.” (His emphasis, not mine).

For those unaware, the Federal Reserve is the central banking system in the United States. The Fed has what is known as a “dual mandate” to ensure maximum employment and stable prices in the economy.

Although this is a simplification, to meet the demands of this dual mandate, the Fed changes the U.S. money supply in the economy through two main tools:

  1. Setting the interest rate that is charged to depository institutions (i.e. commercial banks) on loans they receive from regional Fed banks.
  2. Engaging in open market operations – the buying and selling of federal agency and U.S. Treasury securities.

In my opinion, transparency is typically a good thing to have and that extends to the Federal Reserve. After all, if the Fed has no transparency, what would stop it from engaging in dubious practices to enrich banks at the expense of every other American, which is even more worrying considering the Fed’s influence over the economy?

Thankfully, that is why the Federal Reserve is already audited by the Fed’s inspector general, the Government Accountability Office and private accounting firms (such as the New York Fed’s audit by Deloitte & Touche). In fact, with a little work, it’s possible to find pretty much anything a person could desire regarding the Fed and its practices.

Here’s a list of everything I can find:

What more could someone possibly want?

It seems to me all claims to “audit” the Fed like what the Paul doctors support are really just attempts at political grandstanding to undermine the Fed’s authority because they disagree with its policies. Rand practically admits as much when he says, “the regulatory power (over the Fed) should be placed back under the control of Congress.”

Although it is perhaps somewhat tempting to grant additional Congressional and government control over the Fed, such an act is extremely misguided.

Most economists agree the actions taken by the Federal Reserve in the past 30 years have performed admirably in smoothing the business cycle. Although we really don’t have a counterfactual, I would agree with the vast majority of economists that the actions taken by Fed Chairman Ben Bernanke during the recent financial crisis were instrumental in avoiding a second Depression.

It is my view the main reason the Fed has been such as effective American institution is precisely because it is independent from the government and as such, it is not susceptible to the boneheaded pressures and whims of politicians who have no clue about optimal monetary policy.

The available empirical data seem to enforce such a view.

Source: Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence

Historically, countries that have had the most independent central banks have typically had the smallest amounts of inflation as well as the most stable prices. In the United States, it is also likely not a coincidence that much of Richard Nixon’s presidency were characterized by a high inflation rate and high unemployment, since Nixon was able to essentially bully the Fed chairman at the time and get the monetary policy he wanted.

Unsurprisingly, most economists have negative views, to say the least, of attempts to limit Fed autonomy.

Images courtesy of the IGM Economic Experts Panel of economists across the political spectrum.

Lastly, despite his hostility to the Fed’s (successful in my view) control of the money supply, Paul does not provide any alternative, but he has alluded to some in the past.

In 2013, Paul said, “We need to think about our currency that once upon a time had a link to a commodity, and I think we should study it.” Although this is not outright advocating for a gold standard, considering who his father is and some of his other views, I don’t think it is much of a stretch to suggest a Paul presidency would prefer a return to the gold standard.

Unless one happens to be Zimbabwe, there is simply no legitimate reason to support a gold standard and economists universally agree as much.

This is because the price of gold is extremely volatile and the subject to much speculation, especially in the short-run. As an entrepreneur, it is extremely difficult to make plans for the future if the price level could just as easily be +/- 10% the upcoming year, whereas under the Fed, one can expect prices to pretty consistently increase by about 2% each year. There is simply no evidence that effectively hamstringing the Fed by enacting a gold standard would improve or end our financial woes (ditto for Bitcoin and every other Fed alternative).

Economist Paul Krugman writes, “And it’s true: under the gold standard America had no major financial panics other than in 1873, 1884, 1890, 1893, 1907, 1930, 1931, 1932, and 1933.”

I think it’s also telling that Paul’s Senior Economic Advisor for his campaign is Mark Spitznagel. Not only is Spitznagel not an economist (he is a hedge fund manager with a background in mathematics), but he’s a self-avowed practitioner of the Austrian School of Economics.

Without drawing myself into an abstract discussion on economic theory, just note the relevant aspects of Austrian economics have long been accepted into the field as a whole, while the stuff that is almost certainly incorrect has been discarded. There are reasons why most economists and even most libertarian and libertarian-leaning economists are not Austrians. Apparently Paul never got that memo and honestly, despite our relatively similar personal philosophies and some of the ludicrousness of the remaining Republican field, I think a Rand Paul presidency (almost entirely due to his monetary policy) worries me more than any other Republican candidate.

For more economic analysis, click here for an overview of Bernie Sanders or here for an analysis of Rand Paul’s general spending and debt policies.

Wyatt Bush is an economics major and assistant editor to CMU Insider. 

3 thoughts on “Analysis: An Economic Perspective of Rand Paul – Monetary Policy

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