I noticed last week that there was going to be a moving of the goalposts when it came to right-wing conservatism and the Federal Reserve. This is accelerating. Yesterday Economics 21 released a letter calling for an end to QEII signed by a number of economists, financial market experts and conservative political actors.
Like Krugman, I simply don’t know what model they have in mind for why QEII should be stopped. Are they basing their disagreement on a credit-channel model of monetary policy? A form of modern monetary theory? Koo-style debt overhang? That the fund rate has become detached from the financial markets?
This is important because my first question to those opposing QEII is something like this: Suppose we woke up tomorrow and realized that we accidently had the Fed funds rates at 1%, instead of 0-0.25%. Whoops! Should we go ahead and lower it to 0%? (Or separately, should we just raise interest rates.) Kansas City Federal Reserve Bank President Thomas Hoenig, who is worried unemployment might come down too quickly (and is now advising the House GOP), would say no, leave it at 1%. (He wants to raise interest rates with unemployment touching 10%!) So would Raghuram Rajan. The hard-core Koo types would think that lowering the 1% interest rate would make no difference, as all monetary policy is ineffective with a debt overhang. And so on.
There’s a huge difference in saying that QEII is not ideal, won’t do anything, and would be a disaster.
Getting signers on a petition like this can be like herding cats, so my first thought was that they kept it vague on purpose. But reading it again, I saw this:
In this case, we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus.
We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.
Is the idea that unemployment would be lower if the financial reform bill wasn’t passed? Is uncertainty over interchange “swipe-fee” regulation causing 10% unemployment? (And would I still support it if it was?)
If you look at the biggest worries of the Small Business Economic Trends, regulation has gone up a bit, but nowhere near as much as demand:
If there are actual quantitative measures that would support this argument that would be great. The aggregate price mechanisms we’d normally use – inflation, wage growth, unemployment trends across sectors and/or occupations – don’t show anything like a supply side crunch of uneducated low-quality workers, union power (as if with this administration!), fear of government default or stifling regulatory burdens.
The other possibility is that the signers think that a “dual mandate” for the Federal Reserve is a bad idea, and that the Federal Reserve shouldn’t worry about unemployment. Reihan Salam, policy advisor for Economics 21, writes “One could also believe that the U.S. Federal Reserve should not have a dual mandate, but rather should model itself on the European Central Bank.” Mike Pence recently has told media the same thing. Neil Irwin thinks this is the new line for the GOP.
As Mark Thoma has noted dropping a dual mandate wouldn’t change policy: “a single mandate wouldn’t alter the Fed’s current course of action. If the Fed is worried about disinflation/deflation, as it should be, then QEII is what is required for price stability. Dropping the dual mandate won’t change that (and the debt will be “unmonetized” when conditions return to normal and the Fed begins to remove reserves from the system to avoid inflation, so the debt monetization argument doesn’t hold unless you believe the Fed will abandon its long-run inflation target — something it has made very clear it has no intention of doing).”
The Fed has a target it can’t hit. It isn’t doing either of its jobs, price stability or maximum unemployment. At this point, I’d be happy with just the price stability part, which requires aggressive and loose monetary policy. I’d also note that it’s a massive transfer of wealth from the bottom 99% to the top 1%, from debtors to creditors, for the Federal Reserve to not be hitting the inflation target signaled to the markets but instead letting disinflation/deflation however like a specter.
I’d also mention, about the European Central Bank, is that European “maximum employment” policy is through a massive social safety net and a managed worker economy. Our labor markets are normally more dynamic, where the way of generating maximum employment isn’t requiring a worker to be on the board of a company by law and all kinds of other union-driven employment but instead through Federal Reserve monetary policy. If we want to ditch that Fed part, we need a serious new commitment to the safety net.
Or we could let a generation of workers be wasted while industrial capacity just sits around idle.