Honorable
Ron Paul of Texas
Statement before the Financial Services Committee
Humphrey Hawkins Prequel Hearing
During
the 30th year of the Humphrey-Hawkins hearings, it would be helpful
for Congress to reassess the usefulness of the Humphrey-Hawkins mandate.
The dual mandate calls for full employment and stable prices.
Humphrey-Hawkins assumes that the Federal Reserve has unique insights
into the United States economy that no one else possesses, that the Federal
Reserve knows what prices should be and how much unemployment there should be.
Full employment which is brought about through rising inflation will
eventually lead to a stagnant economy which will lead to more unemployment.
30+ years after the stagflation era, I would hope that Phillips curves
are one of those barbarous relics of the past that have been sent to their
graves, along with wage and price controls and
bans on the private ownership of gold.
But
what I wish to highlight the most is the most pernicious part of the
Humphrey-Hawkins mandate is the mandate for price stability.
This objective overlooks the natural tendency of prices to fall over
time. As new production technologies
are brought on line, factories gear up, economies of scale are reached, and the
prices of goods will decrease.
Goods
which originally are affordable only by the very rich, over the course of time
and because of the fall in prices will become available to the poor and the
middle class, raising the standard of living of all Americans.
100 years ago a rich person might have driven a car and a poor person
would have walked barefoot. Today a
rich person might drive a Lexus, while a poor person drives a Kia, but they both
have cars, and shoes.
Price
stability attempts to disadvantage consumers by keeping prices stable, rather
than allowing them to take their natural course of decline.
This policy comes from two misguided notions: that lower prices lead to
lower profits, and that lower prices lead to deflation.
In its effort to ensure price stability, the Federal Reserve
resorts to inflation targeting, using the federal funds rate and open
market operations to increase the money supply at an ostensible low rate,
introducing a subtle but pernicious inflation into the monetary system.
Inflation benefits the government and the well-off, the first users of
the new money, but harms those who receive the new money last, those who are
predominantly poor and middle class.
But
prices do not just apply to goods, they also apply to the price of labor, or
wages. Wage raises are often indexed
to government CPI figures, which are notoriously prone to manipulation.
While official government figures show a CPI under 3%, according to the
methods used when CPI was first calculated the current rate of inflation is over
10%. What this means is that while
wages will remain stable in real terms, the price of goods and services will
increase at a faster rate, leading to a decrease in the real standard of living.
The Fed's loose money policy then leads to the lure of easy credit, which
will hook more and more families, who will find themselves falling deeper and
deeper into debt to finance their lifestyles.