Tuesday, February 08, 2011

Paul Ryan Teaches Economics To The "Senior Economics Reporter" On CNBC This Morning

Now that he's Chairman of the House Budget Committee, Wisconsin Republican Paul Ryan has been appearing on CNBC's morning program, SquawkBox, more frequently.

If you haven't seen, heard or read Ryan, he's a remarkably intelligent and economically savvy elected official.

This morning saw a priceless moment wherein Ryan befuddled the economically-challenged, CNBC so-called "senior economic reporter" Steve Liesman.

Ryan was responding to questions regarding monetary policy and the Fed. He had contended in a remark that the nation's fiscal and monetary policies are heading for conflict. Liesman, hoping for an easy chance to make Ryan look bad, jumped in to ask for elaboration.

By way of background, Ryan offhandedly referred to a piece he and heavyweight monetary policy economist John B. Taylor had co-authored in Investors Business Daily recently. Taylor is, of course, the author of the influential Taylor Rule, explained below by Taylor,

"Let me start with the example of the Taylor rule. It says that the short term interest rate equals one-and-a-half times the inflation rate plus one-half times the real GDP utilization rate plus one. So, in 1989, for example, when the federal funds rate was about 10 percent in the United States you could say that the 10% was equal to 1.5 times the inflation rate of 5% (or 7.5) plus .5 times the GDP gap of about 3% (or 1.5, which takes you to 9) plus 1, which gives you 10. Now this is a very specific rule, and it can be written down mathematically as shown in Figure 1, which also shows the way the rule was written when first presented in 1992. Of course, I did not name it the Taylor rule. Others did that later. Originally the rule was meant to be normative: a recommendation of what the Fed should do. It was derived from monetary theory, or more precisely from optimization exercises using new dynamic stochastic monetary models with rational expectations and price rigidities. Like most rules or laws in economics it is not as precise as most physical laws, though that does not mean it is less useful. It was certainly not meant to be used mechanically, though it now appears that monetary policy might operate even better if it stayed closer to the rule."
Ryan is an explicit Friedmanite on most economics issues. Especially, if you listen closely to his comments, monetary policy.

The priceless moment came when Liesman demanded that Ryan cite, on the spot, the rule he preferred the Fed follow for monetary policy.

Ryan slowly, carefully explained that he is a member of Congress, not a professional economist. Therefore, he said, he could not and should not specify the rule, but he knew he preferred that the Fed use one.

All the while, the camera showed Liesman's pudgy face in a frown, with a sort of dull-witted mask of slow comprehension. He began to slowly realize that Ryan is far, far more intelligent than he, Liesman, is, both economically as well as in terms of the media dynamics going on at the moment.

You can't possibly script this sort of thing. Ryan just seems to mesmerize Liesman and leave him dumbfounded. Emphasis on the dumb part.

Immediately on the heels of that exchange, Rick Santelli chimed in to chide Liesman for being harder on Ryan than he's ever been on Bernanke. Whereupon the so-called senior economic reporter retorted/admitted that he'd never actually interviewed the Fed Chairman.

Priceless, unscripted business and economic comedy this morning.

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