The Federal Reserve is crucifying the U.S. economy on a cross of two-percent inflation.
The Federal Reserve balance sheet contains roughly $2.5 trillion worth of Treasuries, Fannie Mae bonds and mortgage-backed securities. But there is one asset the Fed considers invaluable. Credibility.
Most people think the central bank's job is manipulating interest rates, but the Fed is really in the business of making and keeping promises about the economy. Lately the Fed is obsessed with a narrow construction of credibility that is holding back the entire country.
The Fed has fetishized two-percent inflation.
WHO'S AFRAID OF 3%?
The Fed makes a very simple promise: It promises to keep inflation at a certain level every year. That level has changed over the past 30 years, but it's currently around 2% a year. If the economy is running too hot, the Fed raises interest rates. If it's running cold, it lowers rates.
For 30 years, this worked spectacularly. Recessions were rare and shallow. Inflation was low. Then 2008 happened. Even zero interest rates weren't enough to revive the collapsing economy. That's still mostly true now. In fact, our disappointing recovery is in large part the result of a central bank
target that no longer serves the economy.
Let's think about why a two-percent
inflation target is a problem now, and what a better target would look
like. The below chart compares the economy's long-term growth trend
(blue) with the actual size of the economy (red). I've included the
numbers going back to 1980 so that you can see that this isn't a case of
the housing bubble making us vastly overestimate the economy's
productive capacity. You can go back further if you like. The results
are the same. The two lines barely deviate from each other -- until now.
(The only other exception is the Great Depression).
have a lot of catching up to do. But a two-percent inflation target --
mostly -- prevents us from getting the catch-up growth we need. Now for
the disclaimer. The Fed doesn't have a strict two-percent mandate. The Fed
is supposed to pursue full employment too. And as Greg Ip of The Economist has pointed out, Bernanke has
said that he is willing to tolerate greater than two-percent inflation if
unemployment is still high. But practically, the Fed's two-percent
inflation target acts like something fairly close to a ceiling. Indeed, wunderkind blogger Evan Soltas
has found that the Fed becomes approximately 17 percent more sensitive
to changes in inflation than in output for each percentage point the Federal funds rate falls. The Fed might say that it'll let inflation run a bit
higher, but history suggests otherwise. So do its forecasts for inflation over the next few years.
that the economic recovery actually picks up. Unemployment is still far
too high, but it's falling at a rapid clip. And here's the crucial bit:
say inflation creeps over 3 percent -- or even hotter. It's hard to
believe the Fed wouldn't tighten in this scenario given its inflation
bias. Higher interest rates would push down growth and slow the decline
in unemployment. In
other words, when the economy is in a deep hole, a too-low inflation
target puts a speed limit on the recovery.
are easy enough fixes for this too. A higher inflation target, for one.
That's basically the same as raising the speed limit. But we can do
better still. To revert to econospeak, a level NGDP target probably
makes the most sense. In English, this means that the Fed should target
the total size of the economy -- that is, inflation and growth together
-- and try to keep it close to its long-term trend. The "level" part of
the "level target" means that the Fed should make up for any past
mistakes. For instance, if the Fed undershoots its targets for a few
years -- basically, the situation we're in now -- then it should try to
catch up and get back to trend as quickly as possible. That's not a
speed limit. It's a speed minimum.
WAIT, HOW WOULD INFLATION HELP?
All of these alternative Fed targets essentially amount to
saying Bernanke and Co. should create more inflation today. That
raises two questions: 1) Would higher inflation really help us, and 2)
If it would help, would it outweigh any costs? Let's consider these in
The case for higher inflation has to do
with debt. More inflation now would make new debt more attractive and
old debt less onerous. When most people think of inflation, they think
about paying more for gas and groceries. How does that make anything
better? The answer is that those prices are set in international markets
and are mostly beyond the control of the Fed. When we talk about the
Fed creating inflation we're talking about wage inflation.
incomes would make it easier to pay off old debts that don't change. To
go back to econospeak one more time, it would speed up the deleveraging
process that's been holding back private demand. It would also make taking out new loans a better deal. We can thank our depressed economy for this. In normal times, higher inflation
just translates into higher interest rates, so more inflation doesn't
make more borrowing make sense. But these aren't normal times. If
inflation goes up, interest rates won't. Borrowers would pay a lower
real interest rate.
There's a specter haunting
this inflation debate -- the specter of the 1970s. Back then, we got
something that most economists at the time didn't think was possible: a
combination of high inflation and high unemployment. (Milton Friedman,
of course, predicted this would happen back in 1968). Previously,
economists had thought there was a fairly clear trade-off between
inflation and unemployment called the Phillips Curve -- if you got more
of one, you got less of the other. What happened in the 1970s? Oil shocks. Cost-of-living-adjustment contracts were common enough back
then that higher oil prices got transmitted to the rest of the economy
in a way they don't today. More expensive oil pushed up both unemployment and
The problems of
the 1970s are not our problems. We've had oil shocks in 2008 and 2011
and 2012 that have not set off inflationary booms. There's little reason
to expect high inflation to coexist with high unemployment today. And as long
as higher inflation is expected, there's little reason to expect
there to be much in the way of actual costs. The Fed just has to tell
us it wants higher inflation.
A CASE OF SELF-INDUCED PARALYSIS?
it's so easy, why isn't the Fed doing it?
On Wednesday, Binyamin Appelbaum of The New York Times asked Ben Bernanke if it was worth tolerating slightly higher inflation over the medium-term to bring unemployment down faster. Here's the Fed Chairman's response:
We, the Federal Reserve, have spent 30 years building up credibility for low
and stable inflation, which has proved extremely valuable in that we've
been able to take strong accommodative actions in the last four, five
years to support the economy without leading to an unanchoring of
inflation expectations or a destabilization of inflation. To risk that
asset for what I think would be quite tentative and perhaps doubtful
gains on the real side would be, I think, an unwise thing to do.
This is equal parts misguided and afraid. Let's
tackle the misguided part first. Inflation has remained low despite the
Fed's unprecedented and unconventional actions the past 4 years not
because of its credibility. Inflation has remained low because of the severity of the slump. Massive deflationary forces have battered the
world economy since 2008. We wouldn't expect, what were in retrospect,
relatively modest asset purchases to radically unmoor inflation
expectations in this context.
broader critique. The Fed is acting as though it gets credibility from
its target itself, rather than from hitting its target. The Fed won't lose credibility if it changes its target. The Fed will lose credibility if it misses its target -- if it gets more (or less) inflation than it wants. If the Fed says
it wants four-percent inflation and gets it, that's no less "credible" than
if it says it wants two-percent inflation and gets it.
I'm afraid to say something else might be going on here. The Fed might be worried that it can't
get four-percent inflation if it says it wants it. This is almost
certainly not the case, but the thing about unconventional strategies is
that they are inherently uncertain. And that uncertainty seems to be
tilting the FOMC towards inaction. The logic is that it's not better to
have tried for four-percent inflation and lost than not to have tried
for four-percent inflation at all. The former risks losing credibility,
while the latter doesn't -- albeit at the cost of an economy running
well below capacity. It's what a certain Princeton professor called a
case of "self-induced paralysis" when he excoriated the Bank of Japan for a similar mindset a
decade ago. Of course, that professor was none other than Ben Bernanke,
which gives this all a tint of Greek tragedy.
Let's try a quick thought experiment. Imagine that you and a friend -- let's call him Ben -- meet up every Sunday at 2pm to workout. But then something comes up. Ben tells you that he has
to leave early the next few weeks -- unless you want to meet at 4pm instead. The obvious solution is get together later. You trust that Ben will show up at 4pm, because he's showed up at 2pm all this time.
It's the same with inflation targeting.
This probably sounds facile. It is. But that's only because the answers to our problems are facile. There's no reason to think prices will spiral out of control if the Fed targets four-percent inflation, because the Fed is credible. And it's not as if the Fed doesn't have experience targeting higher inflation. It did it in the 1980s, when it targeted ... four-percent inflation. That wasn't some inflationary nightmare. That was "Morning in America."
don't doubt that Bernanke wants to do more. I just wish he'd ditch his
soft-spoken, professorial demeanor. Get mean. Maybe practice in the
mirror. (YOU WANT THE TRUTH? YOU CAN'T HANDLE THE TRUTH ABOUT HOW MUCH
INFLATION WE NEED). Whatever it takes to get him to drag the rest of the
FOMC to do more. We promise we won't think you're less credible if you
put people back to work. Just the opposite.
For decades the Man of Steel has failed to find his groove, thanks to a continual misunderstanding of his strengths.
Superman should be invincible. Since his car-smashing debut in 1938, he’s starred in at least one regular monthly comic, three blockbuster films, and four television shows. His crest is recognized across the globe, his supporting cast is legendary, and anybody even vaguely familiar with comics can recount the broad strokes of his origin. (The writer Grant Morrison accomplished it in eight words: “Doomed Planet. Desperate Scientists. Last Hope. Kindly Couple.”) He’s the first of the superheroes, a genre that’s grown into a modern mass-media juggernaut.
And yet, for a character who gains his power from the light of the sun, Superman is curiously eclipsed by other heroes. According to numbers provided by Diamond Distributors, the long-running Superman comic sold only 55,000 copies a month in 2015, down from around 70,000 in 2010—a mediocre showing even for the famously anemic comic-book market. That’s significantly less than his colleague Batman, who last year moved issues at a comparatively brisk 150,000 a month. Mass media hasn’t been much kinder: The longest-running Superman television show, 2001’s Smallville, kept him out of his iconic suit for a decade. Superman Returns recouped its budget at the box office, but proved mostly forgettable.2013’s Man of Steel drew sharp criticism from critics and audiences alike for its bleak tone and rampaging finale. Trailers for the sequel, Batman v Superman: Dawn of Justice, have shifted the focus (and top billing) to the Dark Knight. Worst of all, conventional wisdom puts the blame on Superman himself. He’s boring, people say; he’s unrelatable, nothing like the Marvel characters dominating the sales charts and the box office. More than anything, he seems embarrassing. Look at him. Truth? Justice? He wears his underwear on the outside.
The Denver Broncos quarterback is dismissing as “garbage” claims made in an Al Jazeera documentary that he was supplied with human growth hormone in 2011.
Peyton Manning, the Denver Broncos quarterback, has fiercely denied claims made in an Al Jazeera documentary that he was supplied with human growth hormone in 2011. Manning told ESPN he is “furious” about the report that names him and several other high-profile athletes linked to performance-enhancing drugs.
The Al Jazeera investigation—called “The Dark Side”—is the culmination of months of undercover reporting carried out by British hurdler Liam Collins. Al Jazeera says Collins told pharmacists he interviewed for the piece he was looking to compete in the Olympics in Rio next summer and would do “whatever it takes” to make that happen. The report is scheduled to air Sunday night, but it is already available to watch online.
The charismatic senator’s candidacy was flying high—until he hit turbulence at Saturday’s debate. Will it stall his surge?
MANCHESTER, New Hampshire—Until Saturday’s debate, it was clear that this was Marco Rubio’s moment.
The moment he had waited for, planned for, anticipated for months, for years: It was happening. He had surged into a strong third-place finish in Iowa, outpacing the polls and nearly passing second-place Donald Trump. He’d ridden into New Hampshire on a full head of steam, drawing bigger and bigger crowds at every stop, ticking steadily up into second in most polls, behind the still-dominant Trump. The other candidates were training their fire on him, hoping to stop the golden boy in his tracks.
And then, in the debate, he faced the test he knew was imminent. They came right at him. First it was the moderator, David Muir of ABC News, leveling the accusation put forth by his rivals: that Rubio was merely a good talker with nothing to show for it, just like another eloquent, inexperienced young senator, Barack Obama.
Hillary Clinton’s realistic attitude is the only thing that can effect change in today’s political climate.
Bernie Sanders and Ted Cruz have something in common. Both have an electoral strategy predicated on the ability of a purist candidate to revolutionize the electorate—bringing droves of chronic non-voters to the polls because at last they have a choice, not an echo—and along the way transforming the political system. Sanders can point to his large crowds and impressive, even astonishing, success at tapping into a small-donor base that exceeds, in breadth and depth, the remarkable one built in 2008 by Barack Obama. Cruz points to his extraordinarily sophisticated voter-identification operation, one that certainly seemed to do the trick in Iowa.
But is there any real evidence that there is a hidden “sleeper cell” of potential voters who are waiting for the signal to emerge and transform the electorate? No. Small-donor contributions are meaningful and a sign of underlying enthusiasm among a slice of the electorate, but they represent a tiny sliver even of that slice; Ron Paul’s success at fundraising (and his big crowds at rallies) misled many analysts into believing that he would make a strong showing in Republican primaries when he ran for president. He flopped.
The Islamic State is no mere collection of psychopaths. It is a religious group with carefully considered beliefs, among them that it is a key agent of the coming apocalypse. Here’s what that means for its strategy—and for how to stop it.
What is the Islamic State?
Where did it come from, and what are its intentions? The simplicity of these questions can be deceiving, and few Western leaders seem to know the answers. In December, The New York Times published confidential comments by Major General Michael K. Nagata, the Special Operations commander for the United States in the Middle East, admitting that he had hardly begun figuring out the Islamic State’s appeal. “We have not defeated the idea,” he said. “We do not even understand the idea.” In the past year, President Obama has referred to the Islamic State, variously, as “not Islamic” and as al-Qaeda’s “jayvee team,” statements that reflected confusion about the group, and may have contributed to significant strategic errors.
The championship game descends on a city failing to deal with questions of affordability and inclusion.
SAN FRANCISCO—The protest kicked off just a few feet from Super Bowl City, the commercial playground behind security fences on the Embarcadero, where football fans were milling about drinking beer, noshing on $18 bacon cheeseburgers, and lining up for a ride on a zip line down Market Street.
The protesters held up big green camping tents painted with slogans such as “End the Class War” and “Stop Stealing Our Homes,” and chanted phrases blaming San Francisco Mayor Ed Lee for a whole range of problems, including the catchy “Hey Hey, Mayor Lee, No Penalty for Poverty.” They blocked the sidewalk, battling with tourists, joggers, and city workers, some of whom were trying to wheel their bikes through the crowd to get to the ferries that would take them home.
In honor of the just-begun new Chinese Year of the Monkey, and in keeping with the Chinese fondness for numbering discussions—the Three Represents of Jiang Zemin, the Four Comprehensives of Xi Jinping—here are some number-based assessments of last night’s ABC Republican debate. Please also see the Atlantic’sgroup liveblog from last night, anchored by David Graham; and Molly Ball’s post about the travails of Marco Rubio.
The One Opening Screwup
The jumble of candidates coming out through the tunnel, Big Game-style, was an appropriately weird start to a weird evening. At most live events I’ve been part of, including those the Atlantic puts on, someone from the production staff (sometimes me) is standing one inch out of camera range. That person has a hand on the shoulder of the guest about to be called on stage, and gives a gentle push and says “Go!” when the moment comes. Presumably ABC had such a handler at the off-camera end of the tunnel but not at the other end, to keep people moving onto the stage. Thus the strange Carson-Trump-Bush-Kasich pileup in the tunnel.
Like it or not, their halftime booking is a reminder they're the biggest youngish rock band going.
It seems like a sign of some sort of existential crisis that Coldplay will play the halftime show of the 50th Super Bowl, but I’m not sure whose crisis it is or what it’s about. Should people worry about the famously tough sport of football giving airtime to the biggest soft-rockers of the millennium? Should they lament that America’s favorite championship has been conquered by the Brits? Should they fret about whether Chris Martin will be able to find a confetti gun big enough to cake each and every seat in San Jose’s Levi’s Stadium with rainbow confetti?
Probably no, no, and no. Regarding the macho/wimpy dichotomy: The pop likes of Madonna, Katy Perry, and Beyoncé have, in some critics’ words, queered the halftime show irrevocably; intentionally or not, Coldplay can continue the tradition. (Remember that 40 Year Old Virgin “How I know you’re gay” banter about them?) As for xenophobic concerns: The Who, U2, Paul McCartney, and The Rolling Stones have all headlined in the past. As for the logistics, one imagines that Coldplay’s got excellent colored-paper technology stockpiled from its previous arena tours.
Thenew Daily Show host, Trevor Noah, is smooth and charming, but he hasn’t found his edge.
It’s a psychic law of the American workplace: By the time you give your notice, you’ve already left. You’ve checked out, and for the days or weeks that remain, a kind of placeholder-you, a you-cipher, will be doing your job. It’s a law that applies equally to dog walkers, accountants, and spoof TV anchormen. Jon Stewart announced that he was quitting The Daily Show in February 2015, but he stuck around until early August, and those last months had a restless, frazzled, long-lingering feel. A smell of ashes was in the air. The host himself suddenly looked quite old: beaky, pique-y, hollow-cheeky. For 16 years he had shaken his bells, jumped and jangled in his little host’s chair, the only man on TV who could caper while sitting behind a desk. Flash back to his first episode as the Daily Show host, succeeding Craig Kilborn: January 11, 1999, Stewart with floppy, luscious black hair, twitching in a new suit (“I feel like this is my bar mitzvah … I have a rash like you wouldn’t believe.”) while he interviews Michael J. Fox.
The armed standoff in Burns, Oregon, is a perfect case study for why all defendants need excellent representation—and why the current criminal-justice state is no panacea.
In the early hours of the morning, law professors wonder whether anything we do makes the world a better place.
Today, I feel pretty sure that the answer is yes. That’s because, on January 28, I awoke to a televised image of Ammon Bundy’s lawyer, Mike Arnold of Eugene, Oregon, reading a statement urging the other Malheur protesters to stand down. Arnold is a former student of mine. So is Tiffany Harris of Portland, who represents Shawna Cox, the 59-year-old woman who was arrested in the car with LaVoy Finicum, the militant spokesman who was shot during a traffic stop near the occupied Malheur National Wildlife Refuge.
I couldn’t be prouder.
That’s not because I like their clients. I taught Mike and Tiffany during 16 happy years at the University of Oregon School of Law. During that time, I also taught students who had grown up on ranches in the eastern desert, on farms in the state’s irrigated south, on hippie settlements on the rain-drenched Oregon coast, on the state’s Indian reservations, in the Willamette Valley wine country, and in the sophisticated urban areas around Portland. Oregon, a state the size of Italy, supports a population roughly half the size of New York City. Much of the state is desert or forest; its ecosystems are exquisite but fragile. It is a place that needs careful tending. And by and large, those who live there take that responsibility seriously. Land-policy issues—and there are many—tend to be resolved through painstaking negotiations among local farmers and ranchers, Indian tribes, urban dwellers, and state and local governments.