Sunday, May 11, 2008
Uncle Sam at Work
"Yesterday, the [Fed] lowered the federal funds rate to 2%, it's lowest level since 2004. In a nod to growing inflation fears, the Fed said, 'it will be necessary to continue to monitor inflation developments carefully.' But if we really want to do something about inflation, Congress should repeal the Humphrey-Hawkins Full Employment Act of 1978, which diverted the Fed from its most important job: price stability. When the Fed was created in 1913, its principal role was to maintain a sound currency with stable prices. ... Because goosing the economy in the short run and maintaining stable prices over the long run are often at odds, I'm introducing legislation that would rewrite Humphrey Hawkins and give the Fed just one mandate: price stability. ... The Fed's actions have pushed real short-term interest rates into negative territory. ... Clearly, these negative outcomes are not the intention of Fed policy", my emphasis, Paul Ryan (PR) at the WSJ, 1 May 2008.
"You may also be wondering how a higher tax on energy will lower gas prices. Normally, when you tax something you get less of it, but Mr. Obama seems to think he can repeal the laws of economics. We tried this windfall profits scheme in 1980. It backfired. ... If oil companies believe their earnings from exploring for new oil will be expropriated by government--and an excise tax on profits is pure expropriation--they will surely invest less, not more. ... This tiff over gas and oil taxes only highlights the intellectual policy confusion--or perhaps we should say cynicism--of our politicians. ... They want more oil company investment but they want to confiscate the profits from that investment. And these folks want to he President", editorial at the WSJ, 3 May 2008.
Congressman PR of Wisconsin is naive, in my opinion. The Fed's real mandate from day one was to support the Treasury's debt sales. The US price level in 1913 was about the same as it was in 1792. We never needed a Fed to maintain price stability. The negative outcomes PR decries, commodity price increases and reductions in the earnings of those on fixed incomes are exactly what the Fed intends. Remember, in criminal law a man is presumed to intend the "natural and probable consequences of his acts". Are we to believe Helicopter Ben (1590 SATs) does not know what he is doing? If PR is serious about ending inflation I have another suggestion for him: repeal the Federal Reserve Act.
Are our politicians this stupid? Why should Exxon drill more wells if it can't do it at a profit? I remember the windfall profits tax. It drove the IRS crazy trying to figure out how to compute it and collect it. It diverted IRS resources from audits. It was a fiasco. So? It was so much fun last time, let's do it again.