Prior to his employment at Amoco, Mr. Johnston served as an economist with the RAND Corporation, the Institute for Defense Analyses, and the Secretary's Office of the U.S. Treasury. He served on the U.S. delegation to the United Nations Conference on the Law of the Sea.
Mr. Johnston's current research has focused on electric utility deregulation in Illinois and other states; pollution trading under the climate change treaty, Clean Air Act, and the RECLAIM system for the South Coast Air District; and a general theory of regulation, published in the Cato Institute's Regulation magazine.
Latest posts by Jim Johnston (see all)
- Price Controls, Whether For Labor Or Housing, Don’t Work - July 9, 2014
- Adding Economics to the Immigration Debate - May 20, 2014
- Encrypt Everything! - February 3, 2014
Paul Ryan made an excellent speech to the Economic Club in Chicago this week. The focus was his debt reduction plan. In it, Ryan observes that government spending has increased at a record rate, but the economy has not recovered to any substantial degree.
Control of government spending, according to Ryan, is crucial for a solution. Ryan emphasizes health care costs must be controlled by restructuring the health care bill passed Democrat controlled Congress in 2010. However, Ryan absolves the original Troubled Asses Relief Program (TARP) initiated in 2008 during the Bush Administration by Treasury Secretary Hank Paulson (the former CEO of Goldman Sachs).
The TARP was promoted as a way of unfreezing the credit market by cleaning up the balance sheets of banks that had over-invested in subprime mortgages. But that proved to be too difficult, according to Paulson, so the program was changed to a bailout of the large Wall Street investment banks. Did this keep the financial markets from collapsing? Exchange traded contracts were never in danger as was pointed out by Leo Melamed, Chairman Emeritus of the Chicago Mercantile Exchange in his 2009 book For Crying Out Loud
Some have claimed Ryan made a mistake in criticizing the Federal Reserve for increasing the money supply in an attempt to stimulate employment. On this issue Ryan is right on target. According to Milton Friedman in his 1994 book, Monetary Mischief, when the money supply is increased at a greater rate than the growth in overall economic activity, the eventual result is rampant inflation 24 months later. But first, in six to nine months, comes a modest boost in economic activity. Friedman wrote:
The increased quantity of money enables whoever has access to it—nowadays, primarily the government — to spend more without anybody having to spend less. Jobs become more plentiful, business is brisk, almost everybody is happy — at first.
After the inflation and stagnation kick in, economic activity and employment decline. To reverse the inflation, the growth in the money supply has to be slowed, and with it comes a 24-month recession with a much larger decrease in employment. At the end of the day, a modest increase in employment in the short run, if it occurs at all, is overwhelmed by the huge decrease in employment due to the recession.
However, so far this year there has been no boost in economic activity in the nine months after the increase in the money supply began. This suggests to me that businesses are not fooled into believing that even a short jump in economic activity will happen.
Paul Ryan is mostly right on the debt and monetary issues. As for those of us living in Illinois, we should consider moving to Kenosha, which is in Ryan’s Congressional district