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.
“Here is what I would like for you to know: In America, it is traditional to destroy the black body—it is heritage.”
Last Sunday the host of a popular news show asked me what it meant to lose my body. The host was broadcasting from Washington, D.C., and I was seated in a remote studio on the far west side of Manhattan. A satellite closed the miles between us, but no machinery could close the gap between her world and the world for which I had been summoned to speak. When the host asked me about my body, her face faded from the screen, and was replaced by a scroll of words, written by me earlier that week.
The host read these words for the audience, and when she finished she turned to the subject of my body, although she did not mention it specifically. But by now I am accustomed to intelligent people asking about the condition of my body without realizing the nature of their request. Specifically, the host wished to know why I felt that white America’s progress, or rather the progress of those Americans who believe that they are white, was built on looting and violence. Hearing this, I felt an old and indistinct sadness well up in me. The answer to this question is the record of the believers themselves. The answer is American history.
As the world frets over Greece, a separate crisis looms in China.
This summer has not been calm for the global economy. In Europe, a Greek referendum this Sunday may determine whether the country will remain in the eurozone. In North America, meanwhile, the governor of Puerto Rico claimed last week that the island would be unable to pay off its debts, raising unsettling questions about the health of American municipal bonds.
But the season’s biggest economic crisis may be occurring in Asia, where shares in China’s two major stock exchanges have nosedived in the past three weeks. Since June 12, the Shanghai stock exchange has lost 24 percent of its value, while the damage in the southern city of Shenzhen has been even greater at 30 percent. The tumble has already wiped out more than $2.4 trillion in wealth—a figure roughly 10 times the size of Greece’s economy.
Defining common cultural literacy for an increasingly diverse nation.
Is the culture war over?
That seems an absurd question. This is an age when Confederate monuments still stand; when white-privilege denialism is surging on social media; when legislators and educators in Arizona and Texas propose banning ethnic studies in public schools and assign textbooks euphemizing the slave trade; when fear of Hispanic and Asian immigrants remains strong enough to prevent immigration reform in Congress; when the simple assertion that #BlackLivesMatter cannot be accepted by all but is instead contested petulantly by many non-blacks as divisive, even discriminatory.
And that’s looking only at race. Add gender, guns, gays, and God to the mix and the culture war seems to be raging along quite nicely.
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.
A new book by the evolutionary biologist Jerry Coyne tackles arguments that the two institutions are compatible.
In May 1988, a 13-year-old girl named Ashley King was admitted to Phoenix Children’s Hospital by court order. She had a tumor on her leg—an osteogenic sarcoma—that, writes Jerry Coyne in his book Faith Versus Fact, was “larger than a basketball,” and was causing her leg to decay while her body started to shut down. Ashley’s Christian Scientist parents, however, refused to allow doctors permission to amputate, and instead moved their daughter to a Christian Science sanatorium, where, in accordance with the tenets of their faith, “there was no medical care, not even pain medication.” Ashley’s mother and father arranged a collective pray-in to help her recover—to no avail. Three weeks later, she died.
In 1992, the neuroscientist Richard Davidson got a challenge from the Dalai Lama. By that point, he’d spent his career asking why people respond to, in his words, “life’s slings and arrows” in different ways. Why are some people more resilient than others in the face of tragedy? And is resilience something you can gain through practice?
The Dalai Lama had a different question for Davidson when he visited the Tibetan Buddhist spiritual leader at his residence in Dharamsala, India. “He said: ‘You’ve been using the tools of modern neuroscience to study depression, and anxiety, and fear. Why can’t you use those same tools to study kindness and compassion?’ … I did not have a very good answer. I said it was hard.”
Former Senator Jim Webb is the fifth Democrat to enter the race—and by far the most conservative one.
In a different era’s Democratic Party, Jim Webb might be a serious contender for the presidential nomination. He’s a war hero and former Navy secretary, but he has been an outspoken opponent of recent military interventions. He’s a former senator from Virginia, a purple state. He has a strong populist streak, could appeal to working-class white voters, and might even have crossover appeal from his days as a member of the Reagan administration.
In today’s leftward drifting Democratic Party, however, it’s hard to see Webb—who declared his candidacy Thursday—getting very far. As surprising as Bernie Sanders’s rise in the polls has been, he looks more like the Democratic base than Webb does. The Virginian is progressive on a few major issues, including the military and campaign spending, but he’s far to the center or even right on others: He's against affirmative action, supports gun rights, and is a defender of coal. During the George W. Bush administration, Democrats loved to have him as a foil to the White House. It’s hard to imagine the national electorate will cotton to him in the same way. Webb’s statement essentially saying he had no problem with the Confederate battle flag flying in places like the grounds of the South Carolina capitol may have been the final straw. (At 69, he’s also older than Hillary Clinton, whose age has been a topic of debate, though still younger than Bernie Sanders or Joe Biden.)
The Fourth of July—a time we Americans set aside to celebrate our independence and mark the war we waged to achieve it, along with the battles that followed. There was the War of 1812, the War of 1833, the First Ohio-Virginia War, the Three States' War, the First Black Insurrection, the Great War, the Second Black Insurrection, the Atlantic War, the Florida Intervention.
Confused? These are actually conflicts invented for the novel The Disunited States of Americaby Harry Turtledove, a prolific (and sometimes-pseudonymous) author of alternate histories with a Ph.D. in Byzantine history. The book is set in the 2090s in an alternate United States that is far from united. In fact, the states, having failed to ratify a constitution following the American Revolution, are separate countries that oscillate between cooperating and warring with one another, as in Europe.
Highlights from seven days of reading about entertainment
British Cinemas Need to Do Better for Black Audiences
Simran Hans | Buzzfeed
“The myth that black people don’t go to the cinema becomes a self-fulfilling prophecy, predicated on the assumption that cinemagoers are only interested in seeing themselves represented on screen. This seems to be at the heart of the problem.”
Hump Day: The Utterly OMG Magic Mike XXL
Wesley Morris | Grantland
“Not since the days of peak Travolta and Dirty Dancing has a film so perfectly nailed something essential about movie lust: Male vulnerability is hot, particularly when the man is dancing with and therefore for a woman. It aligns the entire audience with the complex prerogatives of female desire.”
For centuries, experts have predicted that machines would make workers obsolete. That moment may finally be arriving. Could that be a good thing?
1. Youngstown, U.S.A.
The end of work is still just a futuristic concept for most of the United States, but it is something like a moment in history for Youngstown, Ohio, one its residents can cite with precision: September 19, 1977.
For much of the 20th century, Youngstown’s steel mills delivered such great prosperity that the city was a model of the American dream, boasting a median income and a homeownership rate that were among the nation’s highest. But as manufacturing shifted abroad after World War II, Youngstown steel suffered, and on that gray September afternoon in 1977, Youngstown Sheet and Tube announced the shuttering of its Campbell Works mill. Within five years, the city lost 50,000 jobs and $1.3 billion in manufacturing wages. The effect was so severe that a term was coined to describe the fallout: regional depression.