He means that ultimately there is a real economy that matters. People won’t be employed unless they can find employers who need their skills. If a person does’t have a skill that is worth $15/hr, that being the minimum wage, then no amount of expansionary fiscal policy is going to convince someone to hire that person. Unless, of course, the monetary inflation reduces the real wages of the employee below the point where he’s a net value to someone. But that’s kind of contrary to the spirit of a minimum wage.
I think there’s a disconnect here in that some people seem to think that the Fed is just another tool to be used to endlessly tweak the economy to achieve social outcomes, while others think that the Fed’s job is to correct for specific problems with the money supply and otherwise keep themselves out of it.
When arguing for an expansionary monetary policy, the assumption should be that there is an artificial imbalance that needs to be corrected, such as there was in 2008. Expansionary monetary policy is not a never-ending source of wealth. At some point, the distortions it causes will counteract whatever good it was doing. The key is to know when to hit the gas and when to hit the brakes, and it would seem that some people think that so long as you’ve got a gas pedal you should keep pressing it until you reach Nirvana.
Human capital isn’t worth much if you can’t direct it at an activity that will make humans better off. Human capital is not fungible. It’s very specialized and varies tremendously in ability and value. Someone trained as a lion tamer has a lot of value to his ‘human capital’ - until the last zoo lion dies. Then his capital stock diminishes greatly. I don’t care how much money you pour into the economy, no one is going to hire him for his lion taming skills if there are no lions.
Ultimately, a healthy economy means one in which people are productively engaged in building things people actually need, investment flows to a mix of long-term and short term investments according to real factors in the economy, etc.
If you have a huge mismatch in skills vs needs, you’re going to have unemployment. Say, if you need a lot of plumbers but all the kids went to school and studied sociology or gender studies because student loans were free. At some point, you’re going to have to retrain those people in something useful, or you’ll have unemployment no matter how much money is available.
Or perhaps your zero-interest rate regime is causing a lot of long-term investment - more than the market would otherwise demand. At some point, you’re going to have a serious imbalance. You’ll over-build your infrastructure (see: Japan), or you’ll use the cheap money to enable the government to borrow more money for overly-generous social programs that actually work against getting people to re-train or relocate so they can be productive.
Speaking of that… My understanding is that a lot of the U.S. Federal debt is in short-term debt instruments. Anyone know offhand if that’s still true? If so, how much can interest rates be raised when every point of interest costs the government an extra $180 billion dollars per year in interest payments?
Your claims are factually incorrect and you need to recast your thinking. No worries though. The Fed operates under the “The Dual Mandate”, which is generally referred to as full employment and stable inflation. Other central banks have a single mandate of price stability. Greater detail: [INDENT] In 1977, Congress amended The Federal Reserve Act, stating the monetary policy objectives of the Federal Reserve as:
“The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.”
This is often called the “dual mandate” and guides the Fed’s decision-making in conducting monetary policy. [/INDENT] Constant growth of the money supply is not the ultimate goal, nor should it be. It is at best a means. But in reality, the relationship between the money supply and prices is neither stable nor predictable: monetarism has declined as a doctrine and has been replaced by other theories among the hard money folk.
Full employment is a technical term, defined in any macroeconomics textbook. A more specific term is NAIRU: the Non-accelerating inflation rate of unemployment. NAIRU fluctuates over time and would be expected to vary under different labor market policies. It is understood to be a viable target for the central banker. The problem is estimating where it is.
More generally, if you step outside of textbook economics, you need to present an academic paper and empirical evidence if you want the FOMC to take your suppositions seriously.
Another big development today, at least for Fed watchers. Fed Governor Daniel Tarullo says that he doesn’t think it would be appropriate to raise rates this year. That comes on the heels of yesterday’s Fed speech. This either represents a divided FOMC or shifting opinions within the same. I’m guessing the latter.
FOMC: Federal Open Market Committee. This is the group that sets monetary policy.
That’s an actual debate. What’s much less debatable is whether the Fed’s mandate is or even should be to maintain a stable money supply. As I noted, monetarists have generally morphed into fans of the Taylor Rule or some other scheme. And even in monetarism’s heyday, targeting the money supply was seen as a means of pursuing central bank goals, and not an end in itself.
I didn’t want to get too deep into your posts, because I wanted to give you the opportunity to present them again, if you wished.
Computer eated my first response. I’ve been way too busy to rewrite quickly and this question deserves a fuller response than just cite dumping (although cites do follow). Took me a while, is what I’m saying.
The first and most important point is this: to move the financial markets means to change real behavior in the broader economy.
Any argument that says that says financial markets can move without changing broader behavior in some way is completely untenable. The markets don’t exist for their own sake. We buy securities today so that we might consume tomorrow, so that we might transfer our personal production today into personal consumption at another date. Any change in financial prices is going to change our consumption decisions in some way. If we believe we’ll receive higher rewards for delaying consumption, then some of us living on the margin of that decision are going to be pushed into action. Human beings respond to incentives. We don’t have to claim to understand how the markets are changing in order to understand that those changes are having SOME effect on behavior. And let’s be very clear about what this is saying and not saying. This is not an argument for market “efficiency”. You don’t have to believe markets are efficiently incorporating the knowledge of the world into prices to understand that changes in market prices will change behavior in some way. All this is saying is that our behavior is linked – possibly even an irrational, inefficient way – to market prices.
Bottom line: the single best research papers into the effects of QE and other unconventional policies are those that investigate the immediate change in asset prices to unexpected announcements. The best of those that I’ve read has been (pdf) Woodford’s paper at Jackson Hole a few years ago. (We’ve been writing “QE” here, but I’ve just been using that as a placeholder for “unconventional policy”. QE itself is probably a lot less effective than other forms of conventional policy like forward guidance: (pdf) QE acting as a signal of future central bank plans.)
If markets move, then SOMETHING is happening in the economy. I actually think market efficiency is a useful way to approach these sorts of problems but it isn’t necessary. All that’s necessary is to recognize that people respond to incentives. This is something quite different from pure efficiency theories. To believe those financial markets are completely divorced from the broader economy is a much stronger and much less realistic assumption than the (mild) forms of market efficiency.
We know “QE” works because we can see its immediate effect on markets.
Now here I could provide a (pdf) few more papers about (pdf) legitimate financial effects from “QE” but what would be more helpful is to head off another degenerate line of thinking that often appears in poorly thought out papers. If you go hunting for cites, you’ll be able to find “research” that says they found an econometric relationship between QE and financial markets, while not finding any relationship with the real economy.
This is exactly what we should expect.
I repeat: if a central bank is reliably hitting its chosen target then there should be no visible relationship between its own efforts and the broader economy. This is a slightly subtle point that many macroeconomists, maybe most macroeconomists, do not properly understand. Think about an AC thermostat. If the AC is working perfectly, then the temperature inside the room should be a constant. It should not be changing. The AC motor might be running like mad to maintain the temperature, but inside the room there will be no variation in temperature. What this means, mathematically, is that the correlation between how hard the AC is working and the temperature of the room will be ZERO. No covariance, no correlation, no visible relationship at all between the very real effort of the machine and the temperature of the room. If we could measure the outside temperature we’d see a clear relationship. But in the case of the economy, the “outside temperature” is stuff we cannot actually observe. We can’t peer inside people’s minds to see their propensity to spend. We’re stuck with measuring the room temperature. Success means the relationship disappears.
This would even potentially be true of financial markets, if central banks operated under completely transparent rules. There would quite possibly be no visible relationship between central bank action and asset prices if policy was so mechanical that it could be perfectly predicted from the broader economic situation. The reason we see markets move is because markets are surprised. And to say it again: the very fact that markets are moving necessarily means that something deeper is happening because (almost) no one cares about those markets for their own sake. Financial markets are simply the means for a deeper end. You need some more assumptions (e.g. weak efficiency) to interpret price movements – in order to understand how exactly the broader economy is being changed – but you don’t need that to know there’s some kind of effect that’s actually happening.
Now there’s one final interesting thing to say here. If the central bank is reliably hitting its actual target, we shouldn’t be able to see any correlation. The flip-side of that (contrapositive) is that if we do see a correlation between central bank actions and the broader economy, that would necessarily mean they fail to consistently hit their target and so they have to overcompensate in order to get back to what the desired temperature is supposed to be. The least successful central banks should be showing the strongest relationship between their efforts and the broader economy. And although the sample size is small, I think this is probably what we can see in cases like Japan’s lost decade or Sweden or the ECB, all of which raised rates prematurely. Their incompetence has meant that a relationship has visibly appeared where none should actually exist. (Implicit in this argument is that the central bankers actually agree with and want to hit some target.)
So you have some cites to look over. The most important is the first I listed, the Woodford paper. More important than those, however, is the right way to approach the problem. Shifting the financial markets mean something deeper has happened. The people who can print money can move the markets. This shouldn’t even have to be said.
Whether that’s a good idea or not is a deeper question. I’m not more than 90% sure about most any topic in economics, but I’m fairly close to 90% on this one topic because all the evidence is lining up in exactly one way.
Out of curiousity, have you studied complexity economics at all? Looking at QE through that lens, you could say that a ‘surprise’ like QE is an input into the complex adaptive system of the economy, and the only thing we can really say about that is that the economy WILL adapt to its existence in some way. Products will rise or fall, prices will move, investment patterns will change. After all, that’s the whole point to QE. But the complexity economics lens also says that the precise form of those changes is not predictable in the longer term, and the longer the QE or other intervention remains in place, the more iterations will happen in the economy and it will eventually diverge from the short-term effects of the change, and in unpredictable ways.
Hellestal, thanks for the citations. I’m going to make a few comments before I read them.
I mostly agree with this. But if this is the case, then there should be some measurable relationship. See elaboration below.
Interesting claim.
I actually agree with all of that. I find it interesting if, say, QE leads changes in the 10 year treasury rate but not changes in the real economy but I agree that such results need to be treated with care. My approach would be to look at the effects of QE (or whatever policy) on exchange rates and interest rates, then use pre-existing estimates of various real economy elasticities on those financial variables. It’s rough, but I find it acceptable. Though even better would be try to get a handle on how those elasticities vary with circumstance - a tall order.
Another method would involve looking at shifting sectoral shares and somehow tie them to changes in fiscal and monetary policy. I have in mind Peter Temin’s work on the Great Depression. In other words, while I emphasize empiricism, I’m somewhat forgiving of lost struggles with endogeneity or other technical estimation issues even when papered over somewhat.
Some day I suspect Barry Eichengreen will pen a definitive treatment of the Lesser Depression. But first it has to end.
Thanks again for the links.
Fed watcher news, from Calculated Risk: Tomorrow, “at 8:30 AM, the Consumer Price Index for September from the BLS. The consensus is for a 0.2% decrease in CPI, and a 0.1% increase in core CPI.”
Today, the Atlanta Fed released their estimate of Q3 GDP. Their model has been a little low lately, but they plot it along with the Blue Chip forecasts. Both have headed downwards, which is what I would emphasize rather than any particular level. https://www.frbatlanta.org/cqer/research/gdpnow.aspx?panel=1
I have a very basic question. I’m sure it’s been asked and answered many times, but please have patience with me and tell me the answer again in simple words.
The FRB has, in effect, injected trillions of dollars into the economy via QE. The purpose of this is to increase employment and (at least in the opinions or hopes of many) to increase inflation, no?
Yet nearly $2 trillion (over half the QE, IIRC) is sitting in banks’ excess reserves accounts. What function does this money serve? Or is just an accounting illusion – an equivalent amount of cash would be sitting elsewhere anyway?
If the intent of QE was to inject money into the real economy, aren’t the excess reserves just a waste? And if so, why does the FRB pay good interest on that money, discouraging banks from injecting it into the economy? I know that part of the answer is that by paying interest on these accounts, the FRB provides a floor to prevent interest rates from falling still further. But that can’t be the whole story, can it?
I mean, I’ve glanced at it but I don’t know anything substantive about it.
Before you wrote that, it would have never consciously occurred to me to consider relying on those elasticities.
They come from a different universe.
I might actually argue “no” to that. Well, partly.
If you could peer inside the heads of the decision-makers, increasing inflation might possibly turn out to be the third or fourth or fifth priority of the average member of the FOMC. More important goals could include maintaining bank liquidity, avoiding outright deflation (rather than creating higher inflation once deflation has been avoided), signaling future interest rate decisions, and avoiding public embarrassment.
This is to say that they might strongly prefer to consistently undershoot their legal mandate if it means they can achieve some of their other (non-legal) goals. And really, a fair reading of Fed minutes since 2008 would, I believe, support that. This is important because it relates to your next questions.
In my opinion, you’ve come to exactly the right place to ask this question. Of course, you should keep in mind that lots and lots and lots of people disagree with me about the answer.
But I think they’re wrong.
If a money genie comes down and gives you a million bucks, you might feel pretty happy about it. If the genie then tells you that they will put a bullet in your brain if you spend even a single dollar of that money, then you will feel less happy about it. Does the money exist? Sure, the money genie can create money. That’s how they roll. But is the money important for the economy? Ah, not so much. The problem is entirely the condition on which the money can be spent. We can think of it like a game.
**1 ***- private bank decision***
/ \
/ \
lend / \ don't lend
/ \
2 / or \ 3 ***- Fed decision***
raise /\ / \ maintain
rate / \ / \ zero
/ \ / \ rate
/ \ / \**
A b c *D*
The top node, position 1, is the private banks’ decision to lend their excess reserves, or to not lend that magical new genie cash. The banks have to make long-term lending decisions, so they lend “first” and then the Fed or whatever other government bank we’re talking about responds to whatever is happening in the economy. If banks lend, the Fed is left with the decision at node 2. If banks don’t lend, the Fed faces the decision at node 3.
In either case, the Fed can either raise the rate of fed funds or maintain zero interest. The result is four different potential outcomes.
A: Banks lend and the central bank raises rates to tighten money. Bankers are unhappy. The money genie gave them cash, and when they used that cash on loans they got shot in the head. Tighter money means the loans they made are more likely to go bad. The central bank is “happy” because it controlled any potential inflation from all that lending.
b: Banks lend and the central bank maintains zero interest. Banks are happy because they lent money, and even after lending their subsequent cost of funding remained low. The central bank under current management, however, is unhappy because inflation is higher than they would like. In other words, the (relatively) hawkish central bank is not down with this decision. They’d rather pull the trigger in this case. If the Fed under current management is faced with this situation, it will choose A over b.
c: Banks don’t lend and the Fed raises rates anyway. Bad for both.
D: Banks don’t lend and the Fed doesn’t raise rates. If the Fed is stuck at decision node three, this is the choice they’ll make. They can’t justify raising rates too quickly if banks aren’t lending their excess reserves. They’ll choke the economy. That means that banks, when they’re looking at the expected Fed response are making a choice between A and D. And that’s an obvious decision for them. They’ll get shot in the head by the money genie if they use the money, and they won’t get shot if they don’t use the money. So the vast majority of the money stays in excess reserves. Equilibrium is at outcome D.
I call this whole thing Chekhov’s conditional gun.
The entire structure is built on Fed response, the “Fed reaction function”. Bank decisions are entirely dependent on what they think the Fed will do, because whether or not they get shot is totally dependent on the conditions that will make the Fed pull the trigger on the gun. The Fed pulled out that gun in Act One, and that’s why everybody is afraid of getting shot in Act Three.
If you read their announcements, their goal isn’t really to inject money into the real economy. At least not exclusively. They have other things that they consider important. In fact, for QE1 they were explicitly saying that it was important for them that the money NOT hit the real economy. The whole purpose was bank liquidity, which is why they simultaneously created a trillion bucks and then started paying banks to not use the money they created. Interest on excess reserves showed up with QE1 and it showed up specifically to prevent all that new cash from hitting the markets.
And now? The only damn thing they like to talk about is “normalizing” interest rates. They really, really want to pull that trigger. They’re itching for an excuse. They’re prioritizing a return to normalcy over everything else right now, it seems, and that’s exactly why the 30-year breakeven (expectation of future inflation) is at 1.7%. Inflation is kinda sorta expected to be below target for the next thirty years. Why? Because they don’t actually give a shit about it, compared to their other goal of increasing the interest rate.
What’s truly funny about this is that if they prioritized inflation/nominal spending and made a genuine promise to raise inflation back to target, they’d have a much easier time increasing the interest rate.
And now I think you have a fuller answer to that question. Or at least, my belief on the answer. Their goals are more complicated than just increasing inflation. They pay good interest on excess reserves precisely because they prioritize other things over hitting their inflation target.
None of this is a stretch. They’re very upfront, straightforward, forthright about their goals in those minutes that are released after every meeting. They really, really, really want to normalize rates. The obvious conclusion we can draw is that they’re more and more willing to pull the trigger at any time now, regardless of inflation being below target (in expectation) for the foreseeable future and even beyond the foreseeable future.
The money is conditional, not permanent. It exists at the capricious whim of the money genie. It can’t be relied upon, and so banks don’t rely upon it.
… and presumably level targeting makes the Fed’s commitment to keep rates low a credible one.
Well you need some sort of link between financial variables and the real economy. Otherwise you just end up papering the issue over with assumptions. As I said earlier, you could also attempt a sectoral approach, something like an elaboration on this.
In Fed Watch news, core CPI has continued its trend upward (now at 1.9%), but the Fed’s alleged preferred measure, the core PCE, was 1.2% in August (a month earlier).
I’m not sure if I understand your question, but a large proportion of income to capital (vs. labor) comes from interest. In fact, interest is often simply a transfer from those with less money to those with more money. The lower the interest rate, the less income flows to the very rich.
Furthermore, lower the interest rates encourage companies that want to expand, and people who want to start businesses. The less you have to pay for up-front money, the more likely it is that your business will succeed.
Finally, full employment - and we’re not there yet - is the surest way to close the gap between income going to capital and income going to labor. When the labor market is tight, businesses must compete for employees. That means - to the extent that the law of supply and demand actually works - they must pay more to employees.
New regs for money market funds kick in next year, in October 2016. I hypothesize that the fed wants to raise rates before then.
Currently, the Fed pays interest on excess reserves to prevent the money market fund industry from collapsing (or charging fixed fees per account). Cite: Alan Blinder. In October 2016, institutions will have to choose between US government money market funds with a fixed NAV of $1.00, and other types of money market funds with a floating NAV. Individual investors will be able to buy fixed NAV funds that invest in corporate securities with short maturities (60 days or less on average), but in times of financial stress the fund will be able to suspend withdrawals for 10 days or impose a 2% withdrawal fee.
Some may not like that. So they will want to buy money market funds based on treasury bills. The problem is that 90 day treasury rates are too low for such funds to be viable. If the Fed wants to avoid having millions of well heeled and pissed off investors, they are going to have to raise the Fed funds rate to… 0.50%? 0.75%? I’m not sure. At any rate extra demand for these sorts of funds could be something like $450 billion which is a lot compared with the $2700 billion currently held. (Problem: Reuters article is ambiguous.)
This is an old argument, but I’m going to bring it up anyway.
Suppose for a moment that the national government spending was balanced: no deficit spending.
The Fed buys bonds with newly created money. Some people and institutions have therefore swapped one form of wealth (bonds) for another (cash). But they’re no richer or poorer than they were before.
Obviously there are ancillary effects. Bond prices go up, yields go down. The cash - as you’ve said - wants to move. The owners will seek out some way to make money from the money they already have. Perhaps they’ll buy bank CDs. Or stocks, or real estate. Maybe they’ll buy a yacht or a second home.
Perhaps more importantly, banks will have additional reserves, which they’ll want to lend out. If they succeed, then of course they’ll be creating more commercial bank money (and debt). And that money will be spent in some way (since people don’t borrow unless they plan to spend.)
On the other hand, if banks already have more reserves than they’re able to lend - in other words: find borrowers for - the reserves may simply pile up.
What I’m arguing is that the central bank, acting alone, and using QE, may have a limited effect on the economy in an environment where people are more concerned about paying down debt than in adding to it.
Now change the scenario and suppose the government is deficit spending.
If the government is deficit spending, the result is its increasing the net worth of the private sector. In that case, the private sector can both pay down debt, and increase spending. The result is both higher GDP and increased real wealth (hospitals, schools, schools, factories, technology, whatever).
What I’m arguing is what I’ve argued before: that the most effective way to reach the maximum performance of the economy is for the Treasury and the Fed to work together.
It’s cute that you think the Fed and the Treasury have the power to ‘reach the maximum performance of the economy.’
You are taking very limited powers that are useful under very specific conditions and turning them into some kind of economic control mechanism that can be tuned to make the economy reach some theoretical level of maximum performance.
This seems to be a common belief now - that the tools useful to correct for specific monetary issues caused by a recession can be used indefinitely to fine tune and tweak an economy.
A better analogy would be the use of amphetemines to help someone get through a crisis. It works for a while, but the longer you use it, the more damage you will do to the normal functioning of the body. It’s no replacement for returning to healthy normal conditions that don’t need the intervention.
Do you have a textbook in mind that provides an analogy like this? I don’t think you do.
Hey, there’s nothing wrong with presenting novel theories that have not undergone peer review. I just did that 4 posts ago after all. It would be nice if they were labeled as hypotheses though.
I started to address your points Sam, but honestly I’m having trouble getting started. You presented no evidence of malinvestments. You presented no argument that investments with a lower rate of return would harm the economy if they were not crowding out higher return investments. You dodged the possibility that a premature interest rate hike would lower core inflation below 1%, creating risks of deflation.
We’ve seen what happens when a central bank raises rates prematurely. Fiscal and monetary tightening destroyed the recovery in 1937-38 and is understood to be a debacle. Japanese tightening prevented its economy from leaving its deflationary trap. You can mumble all you want about vague, unspecified imbalances but real rate hikes still slow the economy and real rate cuts still add to nominal GDP.
LinusK: In your view, when is the appropriate time to raise interest rates and or cut spending/raise taxes? My take is that monetary lags are long and variable (though apparently getting shorter), so you should raise rates if you think anticipated inflation will be above your target, after setting your target high enough so that a surprise negative shock doesn’t put you in a deflation death spiral. (There are other considerations when setting your inflation target, but they tend to justify higher rates than 2%. Also, nominal GDP targeting may be better, but it presents some political challenges as does any change in Fed policy. Doesn’t mean we shouldn’t try.) My point basically is to figure out whether you are a countercyclic policy advocate or whether it’s all stimulus all the time.
It’s just an expression. There’s nothing odd about advocating maximum feasible economic performance. The concept of full employment comes straight out of textbook economics and was accepted by both monetarists and Keynesians back when the former was still around. Some liked to call it the natural rate of unemployment: I see that Mankiw’s text seems to favor that term.
Yes, I inserted the word, “Feasible”: I thought it was implicit.
That was a vivid presentation: I had thought of the Fed moving first but you motivated your story pretty well.
Q: Credit card debt is variable rate and banks have a lot of flexibility insofar as lowering and raising limits is considered. So in that case the Fed moves first, right?
So ,for fixed rate real estate loans and commercial loans, banks move first, ignoring refinancing. And for adjustable rates, the Fed moves first. Or are adjustable rates sticky?
What share of bank portfolios belong in each category?
Yeah, I do. When I hear conservatives talking about tax cits as the answer to everything I give them the same speech. For example, there’s good evidence that tax cuts which increase the deficit may do more harm than good when the debt is above a certain threshold. Of couse that logic also applies to ‘fiscal stimulus’ with borrowed money in situations where debt worries are slowing down the economy.
Please share this good evidence. Then it can be discussed.
There is some evidence. Rogoff and Reinhart noticed in a 2010 working paper that cross country analysis showed slower long run growth in economies with debt loads greater than 90% of GDP. They are fine economists (and I recommend their book This Time is Different), but their working paper contained a spreadsheet error. That 90% figure has weak grounds. I don’t know whether R&R have published a revised and peer reviewed piece. The interesting thing is the way this working paper was prematurely heralded as proof that Big Debt is Bad. I think it fit well with an emotional need on the part of the punditry.
Don’t get me wrong. Addictive borrowing can cause problems. If the economy is near full capacity then additional governmental borrowing can crowd out private investment. That was the situation during most of the Bush years and during the tax cut fueled deficits of the 1980s. It is not the case during recession or when rates have hit the zero lower bound. It’s best to cut deficits during recoveries, like we did during the 1990s and part of the 2000s, and increase them during recessions. That occurs automatically anyway: tax revenues drop during downturns as unemployment payments and the like increase.
Why is the Fed so anxious to raise interest rates?
Over at Vox, Timothy B. Lee observes that Yellen is under political pressure to raise interest rates. The political right has called for interest rate hikes over the past few years, even in the face of declining inflation. The more wrong they are, the more the double down on error. It’s important to them.
Conventional wisdom says that ordinary people should leave monetary policy to the experts, something I mostly agree with. But Vox piece makes an interesting counter-argument:
[indent]One reason for that, however, is that many mainstream pundits have adopted Davidson’s view that monetary policy is too complicated for ordinary people to understand. The result of this isn’t to free the Fed’s technocrats to make decisions without political pressure. Instead, it amplifies the influence of people on the political fringes, most of whom currently believe the Fed has done too much to support the economy.
But the hawks are wrong, and the commonsense perspective of that farmer is right. Higher interest rates slow the economy, and with inflation at very low levels, there’s no good reason to do that. And if ordinary people want to see the economy continue to boom, they might want to make their views known to policymakers. [/INDENT]Saying that farmer Bob (or manufacturing Mark) should have more influence on US monetary policy sounds to me like a desperation move. In general independent central banks have tended to suffer less from chronic inflation. What we need to do is promote textbook economics and ID the crackpots.