The second day of the Future of the Federal Reserve event co-hosted by the New America Foundation and Roosevelt Institute is viewable online at New America and C-Span. You can see all three panels – the first is on full employment, the second consumer financial protection, and the third the future of the Federal Reserve – at those links.
Since I think it is important that Fed vacancies are filled, I’ve been trying to understand what a strong, liberal member of the Federal Reserve would look like. We know what a liberal on the Supreme Court should look like — what about here?
Josh Bivens of EPI gave a five-point outline during the final panel at the event. I’m going to summarize it as follows with my own observations; you should watch the video for the full thing.
1. Commitment to full employment
As Joerg Bibow reminded us in his talk, once you lose a full employment mandate it is that much harder to get the Federal Reserve to move on anything other than monetary austerity. Look at Europe.
Why full employment? Beyond wage growth, we want to see a stronger and more empowered workforce. This ensures that a fairer share of the surplus goes to workers and makes them freer from domination in the labor market. These important goals are more likely to be achieved when unemployment is closer to 5% than it is at 10%. Why the full employment mandate? Because it is necessary to balance out the conservative nature of having regional bankers represented on the FOMC.
We should ask potential candidates what their estimate of NAIRU is and how they go about understanding where NAIRU and the natural rate of unemployment is.
2. Higher inflation target
We need a higher inflation target to deal with the swings in the business cycle. We’ve had thirty years of increasingly lower inflation rates, and right now the Federal Reserve has little it is able to do to stimulate the economy.
Brad Delong makes the case for a higher inflation target at the Economist and Ryan Avent moderates his points.
Alternatives involve setting a different type of target, including nominal GDP. (See here, here, and here for David Becksworth on this topic, Scott Sumner here.) Either way, we need a target that gives the Fed flexibility to deal with severe macroeconomic shocks. The costs of 2% higher inflation are meek compared to the lost output we currently have from this Great Recession.
3. Preemptively pop bubbles
There was a consensus that more needs to be done to tame bubbles that show up because of the financial sector. The hands-off approach was predicated on the ability to clean up afterward. Now we’ve learned that the Fed doesn’t necessarily have that power and it also has political constraints on how aggressively it can try to boost employment.
4. Additional tools other than the short-term interest rate
One way to preemptively pop bubbles is through macroprudential financial regulation. If you have two targets, you need more than one instrument. We need to bring tools like countercyclical capital requirements and financial regulations into play. Perry Mehlring and others have discussed needing the equivalent of the short-term target for the capital markets, as the interest rate reflects a financial system that no longer exists. And Joe Gagnon discussed how the regulatory side and the macroeconomic side of the Federal Reserve not only had bad communication, but also lacked a general language and worldview to work together. This is one area that needs a lot of work.
5. Get out of the debates over the composition of fiscal policy
This was Biven’s pet peeve, and I think it is worth bringing up. The size of the federal budget and the size of the federal budget deficit are an appropriate thing for Federal Reserve members, particularly the president, to discuss. But Greenspan was too aggressive in commenting on tax cuts and assaults on the social safety net, things that are not appropriate for an independent Fed to take part in discussing.
If the Federal Reserve believes that the deficit is too large and it is affecting monetary policy, fine. But if it is suggesting closing that deficit by doing X, Y and Z, it has crossed the line into Congressional policy, using power and influence delegated for a specific responsibility to push political views. Under this requirement, the new conservative requirement that a Federal Reserve nominee can’t support tax increases for Social Security is an invalid complaint as long as the nominee understands it is not their job to support one fiscal policy over another.
What do you think? What’s missing, or needs to be taken out?