What did Ayn Rand teach Paul Ryan about monetary policy?

August 13, 2012

In 2005, Paul Ryan explained that he often looks to Ayn Rand's novel "Atlas Shrugged" as inspiration for his views on monetary policy. "I always go back to, you know, Francisco d’Anconia’s speech, at Bill Taggart’s wedding, on money when I think about monetary policy," he said in a speech to the Atlas Society. So what are Ryan's views on this front? And what do they have to do with Ayn Rand?


(Adam Jennings -- Associated Press)

Over the past few years, economists and policymakers have been debating whether the Federal Reserve should do more to bolster the economy and bring down the still-high U.S. unemployment rate. True, the central bank has already cut interest rates — its traditional tool for stimulus — as far as possible. But the Fed has shifted to a number of novel tactics, such as quantitative easing, to try to bring down real rates even further and inject more money into the economy.

Paul Ryan has been heavily involved in these debates from his perch in the House. But he comes at monetary policy from a somewhat non-mainstream perspective. Like many other Republicans, he has repeatedly criticized Ben Bernanke's efforts to stimulate the economy. But he has also gone further, arguing that the Federal Reserve shouldn't be focused on reducing unemployment, period. And he has argued repeatedly for a "sound money" policy that has left some economists scratching their heads.

Perhaps Ryan's most unconventional opinion on monetary policy came in the summer of 2010, when he told Ezra Klein that the Federal Reserve should actually raise interest rates even as the U.S. economy was still struggling: "[T]here’s a lot of capital parked out there, and we need to coax it out into the markets," he said. "I think literally that if we raised the federal funds rate by a point, it would help push money into the economy, as right now, the safest play is to stay with the federal money and federal paper."

This is not a common view. Most economists tend to think that raising interest rates will slow the economy down. Here, for instance, is Mitt Romney's economic adviser Kevin Hassett explaining the basics of monetary policy back in 2007: "When inflation fears are aroused, the Fed increases the fed funds rate (called a 'tightening') in order to slow activity in sectors of the economy, such as housing and automobiles, that are particularly sensitive to interest rates."

As Hassett explains, raising rates is something the Fed does when the economy is overheating and inflation is at elevated levels. Yet, at the moment, inflation doesn't appear to be the main problem facing the U.S. economy. High unemployment is:

Ryan, however, has been consistent in his view that the Fed should do whatever it takes to fight inflation — and stop trying to fret over the unemployment rate. In 2008, Ryan sponsored a bill that would repeal the Federal Reserve's "dual mandate" to tackle both inflation and high unemployment. Instead, under his bill, the Fed would focus only on "price stability."

To that end, Ryan has roundly criticized Bernanke's efforts to stimulate the U.S. economy by buying up assets and injecting money into the economy. For instance, one way the Fed's efforts are thought to work is by reducing the value of the dollar, helping U.S. exports. But Ryan has countered that there is "nothing more insidious that a country can do to its citizens than debase its currency." (See this report by Reuters's Mark Felsenthal for a round-up of Ryan's criticisms of Bernanke over the years.)

As an alternative approach, Ryan has suggested that the United States should return to "sound money" by anchoring the value of the dollar to, say, the price of a basket of commodities. This isn't quite a return to the long-abandoned gold standard, but it's a roughly similar concept. It would prevent the Federal Reserve from boosting the money supply in times of crisis, as the Fed did in 2008. And Ryan's approach could have other downsides as well. As economist David Beckworth explained here, if the dollar was pegged to commodities like metals or soybeans, it would be greatly affected by outside forces, such as swings in Chinese demand. "For better or for worse," he told FrumForum's Noah Kristula-Green, "the political process can’t allow big swings in the monetary policy by outside forces.”

So what does any of this have to do with Ayn Rand? Over at Slate, Dave Weigel has a longer explanation of the parallels between Ryan's monetary policy and "Atlas Shrugged." In the passages that Ryan has highlighted, Rand's characters lament that statists have destroyed all "objective standards" for currency by abandoning the gold standard and boosting the supply of paper money in order to assist the "looters and moochers." (Franklin Roosevelt abolished the gold standard in 1934 in order to fight the Great Depression — economists such as Milton Friedman and Bernanke have argued that the gold standard had been making monetary policy unduly contractionary.)

"Now, take all of that and apply it to our current debates about the Federal Reserve," writes Weigel. "I hope it doesn't surprise you that Ryan, since at least 2008, has wanted the Fed to abandon the employment mandate. He doesn't say this in a stupid way, like Rick Perry. He says it by citing Ayn Rand."

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