Remember when growth was the norm?
No, really. Not too long ago, Americans could expect good job growth no matter which party was in the White House — Clinton and Reagan created almost 40 million jobs between them. Lately, however, we’ve been seeing anemic growth and even contractions like the one last quarter. This rut, like our previous success, is also bipartisan, with Presidents Bush and Obama presiding over a crawling economy.
What happened? Well, there generally are five economic policy drivers that affect growth: taxes, spending, trade, regulation, and the Federal Reserve’s monetary policy. Taxes didn’t change much 15 years ago (remaining in the 35-40% range for top earners), and despite the considerable hype, President Obama’s regulatory tightening has (until the past year or so) been modest. Neither did trade policy or spending significantly degrade. That leaves monetary policy.
From the 1980s until around 2000, the Federal Reserve followed a set of targeting procedures known as “the Great Moderation.” It was abandoned at the onset of the Bush years and stagnation followed. This suggests we should look at the possibility that the economy does better under a monetary rule. Fortunately, Joint Economic Committee Chair Kevin Brady proposes to do just that with the Centennial Monetary Commission Act.
The bill, which just passed out of the House Financial Services Committee, has received a warm reception from conservative thought leaders including the Heritage Foundation (which issued a background white paper), Cato Institute, a leading AEI senior fellow, Atlas Economic Research Foundation, and American Principles in Action, for whom I work, among others.
What is the Commission and why should you care? It’s being constituted to take an empirical look at the Federal Reserve’s policies over the past 100 years and identify which policies most correlate with good job creation and a thriving economy. Under the Commission:
All monetary rules get studied, no favorites: There’s a consensus among conservatives and among Republicans that we need to move toward a monetary rule, but jumping on one or another without thorough analysis would be premature. The Commission would provide for an empirical look at all the major monetary regimes, including rules (implicitly, the Taylor Rule), NGDP Targeting, the Gold Standard, and others.) and lay out how much growth each one can be expected to generate.
Preserves the autonomy of the Fed: When the Federal Reserve was first established, it was made to be separate from the political infighting of the political branches so that monetary policy wouldn’t become a political football. Having an objective Commission make recommendations is a way of helping the Fed out of uncharted territory without injuring the Fed’s independence. In fact, Dr. John Cochrane, of The Hoover Institution, recently astutely testified before the House Financial Services subcommittee on Monetary Policy and Trade that “the more an agency follows rules, the more limited its powers, the more independent it can be.”
For 15 years our economy has struggled to the point that some people are calling growth far below trendlines “the new normal.” We don’t have to settle for anemic (less than 2%) annual growth rate. The Centennial Monetary Commission represents a chance to get us back to the Old Normal. Our leaders in Congress should vote for the Commission and thereby make a good monetary rule — and the job creation and growth that comes with that — a defining issue.