What else mattered while you weren't watching? The Federal Reserve Board
Something else happened last week that mattered quite a lot. Given yesterday's post, this may seem anticlimactic, but this did matter. Pay attention.
The Federal Reserve Board matters. More than anyone else in the government, they influence the direction of the economy. Prior to the COVID-induced recession, the economy was chugging along beautifully, so of course, Trump wanted to take not only credit, but sole credit for the economy, and presidents always try to take credit for a good economy while skirting blame for a bad economy. Voters, after all, punish incumbents for a bad economy while rewarding them for a good one. Yet, as I must often remind people, the economy is not a machine with the president sitting at a control board, pressing buttons and centrally planning it. That'd be communism. The whole point of capitalism is that the president doesn't do that. The whole point of capitalism is, as much as possible, to divorce the economy from governmental control so that you don't have some illiterate nitwit controlling things.
To the degree that anyone in government can "plan" the economy, though, it'd be the Fed. They influence the economy through monetary policy. They set interest rates, most notably the federal funds rate. What's the big deal here? The big deal has to do with an old concept called the Phillips Curve. The Phillips Curve is the inverse relationship between unemployment and inflation. Milton Friedman rejected the Phillips Curve, but conventional economics is built on it, as is Fed policy. The idea is that if unemployment is high, businesses can't raise their prices because people don't have jobs. If everyone has a job and is flush with cash, businesses raise their prices and inflation goes up. So, you may want low unemployment and low inflation, but that ain't-a-gonna happen. Lower one by too much, and you get the other.
The Fed's job, then, is what we call "the dual mandate." Balance the two. Find a rate of unemployment and a rate of inflation that, combined, we can accept. When inflation gets high, they raise the federal funds rate to bring down inflation. When unemployment gets high, they lower the federal funds rate to bring down unemployment, through higher inflation. The balancing act is hard. What kind of unemployment rate can we get? The... NAIRU. Cool-looking jacket. Non-accelerating inflationary rate of unemployment. Basically, get unemployment as low as you can get it before inflation starts to go up. Inflation? They've been saying maybe somewhere around 2% or so. That's their target on inflation.
And this week, they made a big change. For a while, they have said that they were targeting an inflation rate of 2%, and the inflation rate has been consistently below 2% for really quite a long time. Following the old approach, had inflation hit 2% under the dual mandate, the Fed would have started raising interest rates. Why? Worry about both inflation and unemployment, and even if we weren't at the NAIRU, if inflation had gone over the 2% target, the dual mandate approach and their interpretation of it would have been to raise interest rates given their balancing act.
The new policy: instead of targeting a rate of 2%, target a kind of long-term average of 2%. What does that mean? Since the inflation rate has been so consistently below 2% for so long, they'll let it run significantly higher than 2% for a while in the future, until the average, over a period of time, hits 2%. It changes the time horizon over which they raise their rates later.
Meaning what?
Interest rates are low. They dropped rates to as close to zero as they can. This is about the future, and future policy, as the economy recovers. This is a shift within the dual mandate towards unemployment rather than inflation. This is a policy managing tradeoffs, and managing them in a very specific way. There are ideological debates to be had about the social costs of unemployment and inflation, and you are welcome to go read about that, but my point at the moment is merely that something big just happened. Major policy was made.
And yet, even bringing up the Fed these days means dealing with partisan stupidity and ideological stupidity. Yes, I bash Trump, but the left has gone way off the deep end here.
I will start with Trump, though. Donald Trump's simple-minded narcissism has led him to the following belief about monetary policy. The Federal Reserve Board is a cabal of king-makers who meet in secret to decide whether or not they like the president, personally. If they like the president, personally, they lower interest rates to boost the economy, to help the president politically. If they don't like the president, personally, they refuse to lower interest rates in order to stymie the economy. Thus, they kept rates as low as possible for Barack Obama, whom they liked, but prior to COVID, they didn't want to lower rates for Trump because they didn't like him. It should be no surprise that this is how Trump thinks of monetary policy because this is how Trump thinks about everything. He is incapable of abstract or principled thought. It is as though a group of psychologists decided that they were distraught by the replication crisis, and in order to salvage the discipline, they created a paragon of narcissistic personality disorder in a laboratory so perfect that the discipline could point to Trump and say, "a-HA! See? Here, our model works!" Too bad they forgot about the Goldwater rule. As a political scientist, I am not bound by it.
And of course, this is without getting into Trump's affinity for gold-buggery. I am sometimes asked, do I really believe that Donald Trump is "stupid?" My serious answer is that he is empirically indistinguishable from "stupid." In social science jargon, his words and deeds are "observationally equivalent" to stupidity. Translation: near enough that it doesn't matter.
The left? Several months ago, a group of Democrats introduced legislation that would fundamentally alter the Fed's mandate. Right now, they work under the dual mandate of balancing unemployment and inflation, which are inversely related according to the relatively well-established but not 100% accepted Phillips Curve. A few months ago, some Democratic legislators decided that the Fed's mandate should include, centrally, reducing the racial gap in wealth and unemployment.
Empirically, the racial gaps in household wealth and employment are real. Why do those gaps persist, and what kinds of policies should be under consideration as we think through the answer? These are both complicated questions. Far more complicated than you probably think. Social science is almost always more complicated than you think, particularly if you have been trained to respond to these questions with stock answers.
Here's a replicable experiment in social science: draw up two sets of identical resumes. One with "John Smith"-type names, and one with names more commonly associated with African-Americans. Include gender variation, 'n all that. Send these out to job openings. Care to guess which resumes get call-backs? Are you shocked?
Have you now explained the totality of the racial gaps in wealth and employment? Of course not. Racial biases play a part, but they don't explain everything. The world is just far more complex than that.
Regardless, consider the goal. And think about the tools the Fed has. Yes, tools. The Fed sets monetary policy. That's what they do. There are a few other minor things that they can do, but they set interest rates. Sure, they can conduct some studies, as the authors of the proposed legislation suggested, but monetary policy is their thing.
Now watch how this works as I scan my desk. On my desk I have... um... a... stapler! Not a Swingline, sorry. Anyway, my stapler does what a stapler does. It staples. It binds stuff with staples. It works, as far as it goes, but don't ask it to do anything that it isn't meant to do. Now, observe what happens when some nincompoop asks it to do something that it is not meant to do.
HELP! I need stitches! You are required to give me stitches!
But... all I have is a stapler.
GIVE ME STITCHES!
With... a... stapler? Wouldn't that do more harm than good? It is a rather crude tool. It will cause more bleeding, the staple will come out, the wound will not remain closed. I think you might need to go to an urgent care facility rather than to me. I merely have a stapler, which functions for its purpose, which is not this.
I WANT STITCHES!
____
Anyway, dramatizations aside, whatever you think of the racial gaps in wealth and employment, this is simply not the purview of the Fed. They can write some reports, sure, but they can't make this their mandate because their tools aren't compatible with the problem. Congress? Go. Debate, consider, and be Congress. However, this is not what the Fed does.
Some of the legislators who joined this silly proposal are rather unshocking, as they have no reputation for intellectual rigor. You know who was trying to lead the charge?
Elizabeth Warren.
Warren has a completely undeserved reputation for intellectual seriousness thanks to her "I have a scam for that" campaign, but she is a hack, and a fraud. She saw an opportunity to pander to the left, because if you know nothing about what the Fed does, you are opposing the racial wealth gap.
In 1974, David Mayhew wrote a classic book: Congress: The Electoral Connection. He posited the idea that Members of Congress care exclusively about reelection, not because they do, but because he wanted to see how much predictive power he could get from the assumption. He derived the prediction of three types of behavior: advertising, credit-claiming, and position-taking. This is classic position-taking, in which a legislator spearheads a doomed legislative initiative, not for any serious policymaking purpose, but to show the public, "hey! I'm opposed to the racial wealth and employment gap!"
A serious policymaking effort here would involve things like addressing the educational system, civil rights enforcement, and lots of other stuff. The Fed? No. No.
Warren, though, just saw an opportunity to do the only thing she cares about doing: posturing to the left and feigning at intellectualism. Why do I detest her so? At the risk of Holden Caulfield-ism, I detest phoniness. Ivanka Trump made some comment about Donald being "real," and in a sense... he kind of is. Like Reacher Gilt from Terry Pratchett's Going Postal, he does everything possible to show you that he is a lying con artist. Anyone who rejects that truth is beyond my ability to comprehend, and indeed, beyond Gilt's ability to comprehend. Both Donald and Reacher simply took advantage of those unwilling to accept the open truth of their constant deceptions, laughing all the way to the bank at the idiocy of such willing dupes. Warren, in many ways, is a more conventional con artist because she isn't so open about the fact that she is a fraud.
Off-track. Solving that...
So right now, the Fed is working, in its way. To the degree that you accept the premise of the Phillips Curve and the constraints of the zero lower bound, the Fed is doing its job. A big policy change has occurred, obscured by silly and meaningless spectacles. And you know, this is about money. Money matters. Money matters to me, and it probably matters to you, regardless of whatever nonsense some segments of society like to say.
I like my money, and I want more of it. I like that growing stock market, and I want it to keep growing.
Understand, then, that having an important institution within government that is still working... matters. And it is under attack. Trump has been trying to badger the Fed into serving his short-term approval ratings because that's the only thing that matters to him, and if he holds onto power...
The left? As I have been writing periodically, it is a deeply unhealthy movement. Yeah, I know, Trump can make almost any alternative look palatable, but for all of the dialog within political science and political commentary over recent years on "asymmetric polarization," the polarization has been moving towards symmetry as the left gets progressively crazier.
When you can't tell the kooks, cranks and frauds on your own side, that's when you're in trouble. That's how the GOP wound up with Trump. So maybe I'll leave it at that. Learn to recognize when someone on your side is a kook, crank or fraud. When you lose that ability, you are lost. And when everybody is lost, it is hard for the Fed to remain the sole institution in government that works.
Right now, it kind of is.
The Federal Reserve Board matters. More than anyone else in the government, they influence the direction of the economy. Prior to the COVID-induced recession, the economy was chugging along beautifully, so of course, Trump wanted to take not only credit, but sole credit for the economy, and presidents always try to take credit for a good economy while skirting blame for a bad economy. Voters, after all, punish incumbents for a bad economy while rewarding them for a good one. Yet, as I must often remind people, the economy is not a machine with the president sitting at a control board, pressing buttons and centrally planning it. That'd be communism. The whole point of capitalism is that the president doesn't do that. The whole point of capitalism is, as much as possible, to divorce the economy from governmental control so that you don't have some illiterate nitwit controlling things.
To the degree that anyone in government can "plan" the economy, though, it'd be the Fed. They influence the economy through monetary policy. They set interest rates, most notably the federal funds rate. What's the big deal here? The big deal has to do with an old concept called the Phillips Curve. The Phillips Curve is the inverse relationship between unemployment and inflation. Milton Friedman rejected the Phillips Curve, but conventional economics is built on it, as is Fed policy. The idea is that if unemployment is high, businesses can't raise their prices because people don't have jobs. If everyone has a job and is flush with cash, businesses raise their prices and inflation goes up. So, you may want low unemployment and low inflation, but that ain't-a-gonna happen. Lower one by too much, and you get the other.
The Fed's job, then, is what we call "the dual mandate." Balance the two. Find a rate of unemployment and a rate of inflation that, combined, we can accept. When inflation gets high, they raise the federal funds rate to bring down inflation. When unemployment gets high, they lower the federal funds rate to bring down unemployment, through higher inflation. The balancing act is hard. What kind of unemployment rate can we get? The... NAIRU. Cool-looking jacket. Non-accelerating inflationary rate of unemployment. Basically, get unemployment as low as you can get it before inflation starts to go up. Inflation? They've been saying maybe somewhere around 2% or so. That's their target on inflation.
And this week, they made a big change. For a while, they have said that they were targeting an inflation rate of 2%, and the inflation rate has been consistently below 2% for really quite a long time. Following the old approach, had inflation hit 2% under the dual mandate, the Fed would have started raising interest rates. Why? Worry about both inflation and unemployment, and even if we weren't at the NAIRU, if inflation had gone over the 2% target, the dual mandate approach and their interpretation of it would have been to raise interest rates given their balancing act.
The new policy: instead of targeting a rate of 2%, target a kind of long-term average of 2%. What does that mean? Since the inflation rate has been so consistently below 2% for so long, they'll let it run significantly higher than 2% for a while in the future, until the average, over a period of time, hits 2%. It changes the time horizon over which they raise their rates later.
Meaning what?
Interest rates are low. They dropped rates to as close to zero as they can. This is about the future, and future policy, as the economy recovers. This is a shift within the dual mandate towards unemployment rather than inflation. This is a policy managing tradeoffs, and managing them in a very specific way. There are ideological debates to be had about the social costs of unemployment and inflation, and you are welcome to go read about that, but my point at the moment is merely that something big just happened. Major policy was made.
And yet, even bringing up the Fed these days means dealing with partisan stupidity and ideological stupidity. Yes, I bash Trump, but the left has gone way off the deep end here.
I will start with Trump, though. Donald Trump's simple-minded narcissism has led him to the following belief about monetary policy. The Federal Reserve Board is a cabal of king-makers who meet in secret to decide whether or not they like the president, personally. If they like the president, personally, they lower interest rates to boost the economy, to help the president politically. If they don't like the president, personally, they refuse to lower interest rates in order to stymie the economy. Thus, they kept rates as low as possible for Barack Obama, whom they liked, but prior to COVID, they didn't want to lower rates for Trump because they didn't like him. It should be no surprise that this is how Trump thinks of monetary policy because this is how Trump thinks about everything. He is incapable of abstract or principled thought. It is as though a group of psychologists decided that they were distraught by the replication crisis, and in order to salvage the discipline, they created a paragon of narcissistic personality disorder in a laboratory so perfect that the discipline could point to Trump and say, "a-HA! See? Here, our model works!" Too bad they forgot about the Goldwater rule. As a political scientist, I am not bound by it.
And of course, this is without getting into Trump's affinity for gold-buggery. I am sometimes asked, do I really believe that Donald Trump is "stupid?" My serious answer is that he is empirically indistinguishable from "stupid." In social science jargon, his words and deeds are "observationally equivalent" to stupidity. Translation: near enough that it doesn't matter.
The left? Several months ago, a group of Democrats introduced legislation that would fundamentally alter the Fed's mandate. Right now, they work under the dual mandate of balancing unemployment and inflation, which are inversely related according to the relatively well-established but not 100% accepted Phillips Curve. A few months ago, some Democratic legislators decided that the Fed's mandate should include, centrally, reducing the racial gap in wealth and unemployment.
Empirically, the racial gaps in household wealth and employment are real. Why do those gaps persist, and what kinds of policies should be under consideration as we think through the answer? These are both complicated questions. Far more complicated than you probably think. Social science is almost always more complicated than you think, particularly if you have been trained to respond to these questions with stock answers.
Here's a replicable experiment in social science: draw up two sets of identical resumes. One with "John Smith"-type names, and one with names more commonly associated with African-Americans. Include gender variation, 'n all that. Send these out to job openings. Care to guess which resumes get call-backs? Are you shocked?
Have you now explained the totality of the racial gaps in wealth and employment? Of course not. Racial biases play a part, but they don't explain everything. The world is just far more complex than that.
Regardless, consider the goal. And think about the tools the Fed has. Yes, tools. The Fed sets monetary policy. That's what they do. There are a few other minor things that they can do, but they set interest rates. Sure, they can conduct some studies, as the authors of the proposed legislation suggested, but monetary policy is their thing.
Now watch how this works as I scan my desk. On my desk I have... um... a... stapler! Not a Swingline, sorry. Anyway, my stapler does what a stapler does. It staples. It binds stuff with staples. It works, as far as it goes, but don't ask it to do anything that it isn't meant to do. Now, observe what happens when some nincompoop asks it to do something that it is not meant to do.
HELP! I need stitches! You are required to give me stitches!
But... all I have is a stapler.
GIVE ME STITCHES!
With... a... stapler? Wouldn't that do more harm than good? It is a rather crude tool. It will cause more bleeding, the staple will come out, the wound will not remain closed. I think you might need to go to an urgent care facility rather than to me. I merely have a stapler, which functions for its purpose, which is not this.
I WANT STITCHES!
____
Anyway, dramatizations aside, whatever you think of the racial gaps in wealth and employment, this is simply not the purview of the Fed. They can write some reports, sure, but they can't make this their mandate because their tools aren't compatible with the problem. Congress? Go. Debate, consider, and be Congress. However, this is not what the Fed does.
Some of the legislators who joined this silly proposal are rather unshocking, as they have no reputation for intellectual rigor. You know who was trying to lead the charge?
Elizabeth Warren.
Warren has a completely undeserved reputation for intellectual seriousness thanks to her "I have a scam for that" campaign, but she is a hack, and a fraud. She saw an opportunity to pander to the left, because if you know nothing about what the Fed does, you are opposing the racial wealth gap.
In 1974, David Mayhew wrote a classic book: Congress: The Electoral Connection. He posited the idea that Members of Congress care exclusively about reelection, not because they do, but because he wanted to see how much predictive power he could get from the assumption. He derived the prediction of three types of behavior: advertising, credit-claiming, and position-taking. This is classic position-taking, in which a legislator spearheads a doomed legislative initiative, not for any serious policymaking purpose, but to show the public, "hey! I'm opposed to the racial wealth and employment gap!"
A serious policymaking effort here would involve things like addressing the educational system, civil rights enforcement, and lots of other stuff. The Fed? No. No.
Warren, though, just saw an opportunity to do the only thing she cares about doing: posturing to the left and feigning at intellectualism. Why do I detest her so? At the risk of Holden Caulfield-ism, I detest phoniness. Ivanka Trump made some comment about Donald being "real," and in a sense... he kind of is. Like Reacher Gilt from Terry Pratchett's Going Postal, he does everything possible to show you that he is a lying con artist. Anyone who rejects that truth is beyond my ability to comprehend, and indeed, beyond Gilt's ability to comprehend. Both Donald and Reacher simply took advantage of those unwilling to accept the open truth of their constant deceptions, laughing all the way to the bank at the idiocy of such willing dupes. Warren, in many ways, is a more conventional con artist because she isn't so open about the fact that she is a fraud.
Off-track. Solving that...
So right now, the Fed is working, in its way. To the degree that you accept the premise of the Phillips Curve and the constraints of the zero lower bound, the Fed is doing its job. A big policy change has occurred, obscured by silly and meaningless spectacles. And you know, this is about money. Money matters. Money matters to me, and it probably matters to you, regardless of whatever nonsense some segments of society like to say.
I like my money, and I want more of it. I like that growing stock market, and I want it to keep growing.
Understand, then, that having an important institution within government that is still working... matters. And it is under attack. Trump has been trying to badger the Fed into serving his short-term approval ratings because that's the only thing that matters to him, and if he holds onto power...
The left? As I have been writing periodically, it is a deeply unhealthy movement. Yeah, I know, Trump can make almost any alternative look palatable, but for all of the dialog within political science and political commentary over recent years on "asymmetric polarization," the polarization has been moving towards symmetry as the left gets progressively crazier.
When you can't tell the kooks, cranks and frauds on your own side, that's when you're in trouble. That's how the GOP wound up with Trump. So maybe I'll leave it at that. Learn to recognize when someone on your side is a kook, crank or fraud. When you lose that ability, you are lost. And when everybody is lost, it is hard for the Fed to remain the sole institution in government that works.
Right now, it kind of is.
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