ON-Lion Letter

In March, Bradley Prize recipients Allan H. Meltzer and John B. Taylor testified before the U.S. Senate Committee on Banking, Housing, & Urban Affairs during a hearing on Federal Reserve accountability and reform.

"During the Reagan years, the Federal Reserve first produced a recession and then a strong recovery.  This was a monetary cycle," according to the prepared remarks of Meltzer, the Allan H. Meltzer Professor of Political Economy at Carnegie Mellon University's Tepper School of Business.  "Contrast the current cycle.  The Federal Reserve contributed to but did not cause the contraction, and it cannot produce a Reagan-like (or Volcker-like) recovery.  In that recovery, with relatively high real interest rates of 6 to 7 percent in 1983 and 1984, tax cuts [] and animal spirits created 17 million new jobs during the 1980s.  Unlike the current recovery, unemployment by blacks dropped 2.8 percentage points.  Black household income rose 84 percent.

"Opportunities for blacks followed from a very different from current policy of increasing transfers, anti-business actions, burdensome regulation and taxation," Meltzer continued.  "The administration must realize that the Reagan policies worked much better.  And the Federal Reserve should recognize that they cannot do much if anything about real problems.  After its good response to financial failure, the Federal Reserve has made multiple errors that suggest strong political pressure either internally, externally, or both.

"Our economic problems will continue until a pro-growth policy replaces the current fiscal and regulatory policy," Meltzer concluded.  "Business investment will not revive until businessmen see more reason for optimism.  That may begin to happen as the current administration becomes more of a lame duck that cannot continue to increase costly regulation."

According to his prepared testimony, Taylor focused "on a particular reform that would improve the accountability and transparency of monetary policy and lead to better economic performance.  This reform would simply require the Fed to describe its strategy for monetary policy."

Taylor is the Mary and Robert Raymond Professor of Economics at Stanford University and the George P. Shultz Senior Fellow in Economics at the Hoover Institution, where he chairs its Working Group on Economic Policy.  Milwaukee's Lynde and Harry Bradley Foundation supports the Working Group on Economic Policy.

"In considering the merits of such a reform," Taylor continued, "I think it is important to emphasize the word strategy in the bill.  Though monetary economists often use the word 'rule' rather than strategy, the term rule can sometimes be intimidating if one imagines that a rules-based strategy must be purely mechanical, contrary to what I and others have argued for many years."  Congressional committees are "in a good position -- and in a unique position in our government -- to oversee monetary policy in a strategic rather than a tactical sense.  The most effective way to exercise this oversight is to require that the Federal Reserve describe its strategy publicly ...."

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