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We have an unemployment problem, not an inflation problem

Paul Ryan may be better known for his fiscal policies of deficit reduction and austerity, but his monetary policies are just as important.  In fact, his stance on these issues go hand in hand – as he feels that Congress should do less for the sluggish economy, he argues the same for the federal reserve.  For Ryan, the Fed should abandon it’s dual mandate (it’s balanced approach of stabilizing prices and maximizing employment) and focus strictly on controlling for inflation.

He fears that the recent efforts of the Fed to stimulate the economy through quantitative easing (increasing the money supply by buying financial assets) will cause unsustainable levels of inflation and weaken the dollar.  He made his views clear after telling Bernanke that such actions have “highly undesirable unintended consequences.”

The trends mesuring inflation, though, don’t back up his fears.  Below is the standard measure the Fed uses to measure inflation.HHInflation.pngAfter the oil shocks in the 1970s, inflation has been on the steady decline.  However, the unemployment rate is still hovering above 8%.  In other words, unemployment is the issue, not inflation.  Yet, Ryan wants the Fed to focus on only inflation.

Quantitative easing is not a panacea, but it does have some stimulative effects on the economy.  It could have substantial effects on the economy if it were coupled with fiscal stimulus.  Ryan’s focus on inflation misses the big picture.

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  1. Pingback: We have an employment problem, not an inflation problem (part 2) « between interests & ideas - August 31, 2012

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