The Daily Item, Sunbury, PA


March 15, 2013

Does Ryan Really Believe His Economics?


In other guises, Ryan is a believer in markets, another place where smart people try to forecast inflation. Consider the market for government bonds. The difference between the interest rates on two kinds of bonds — 10-year government notes and otherwise-similar obligations whose payoff is indexed to inflation — can be interpreted as a market-based inflation forecast. The current prices of these bonds suggest inflation is expected to average only 2.5 percent over the next decade. And this probably overstates things, because traders are often willing to pay more for inflation-linked bonds to insure against bad outcomes.

Why is everyone so much less worried about inflation than Ryan? Let's reflect on the underlying forces that drive prices. Textbook economics relies on the Phillips curve, which suggests that inflation accelerates when the economy starts to overheat, or when inflation expectations get ignited. But expectations remain muted. With unemployment at a stubbornly high 7.7 percent (and in Ryan's view, unlikely to fall soon), it's hard to see inflationary pressures anywhere.

None of this is to say that inflation doesn't remain a concern. Unwinding the Fed's bond-buying program will require some care. And there are specific sectors that could heat up. It seems plausible that inflation could tick above 2 percent at some point. But this is still consistent with a working definition of price stability, and not "debasement of our currency."

The point is that Ryan's inflation forecast simply isn't credible. It's not just another slightly different view on the economy. It's a radical departure from the views of those on both the left and the right. It's so far from the realm of the likely that I have yet to see a serious Republican economist who would defend it.

So what's really going on? Perhaps Ryan doesn't actually believe his own inflated claims, and this is just cynical politics as usual. Fear is easy to sell, and he's a willing purveyor. But to what end?

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