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.
Freddie Gray's death on April 19 leaves many unanswered questions. But it is clear that when Gray was arrested in West Baltimore on the morning of April 12, he was struggling to walk. By the time he arrived at the police station a half hour later, he was unable to breathe or talk, suffering from wounds that would kill him.*
Gray died Sunday from spinal injuries. Baltimore authorities say they're investigating how the 25-year-old was hurt—a somewhat perverse notion, given that it was while he was in police custody, and hidden from public view, that he apparently suffered injury. How it happened remains unknown. It's even difficult to understand why officers arrested Gray in the first place. But with protestors taking to the streets of Baltimore since Gray's death on Sunday, the incident falls into a line of highly publicized, fatal encounters between black men and the police. Meanwhile, on Tuesday, a reserve sheriff's deputy in Tulsa, Oklahoma, pleaded not guilty to a second-degree manslaughter charge in the death of a man he shot. The deputy says the shooting happened while he was trying to tase the man. Black men dying at the hands of the police is of course nothing new, but the nation is now paying attention and getting outraged.
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During her initial hearing, the seats behind Lynch were filled with more than two dozen of her Delta Sigma Theta Sorority sisters arrayed in crimson-and-cream blazers and blouses, ensuring their visibility on the national stage. These Delta women—U.S. Representatives Marcia Fudge and Joyce Beatty among them—were there to lend moral support and show the committee that they meant business. The Deltas were not alone. The Lynch nomination also drew support from congressional representatives from other black sororities: Alpha Kappa Alpha members Terri Sewell and Sheila Jackson Lee took to the House floor to advocate for a vote while Sigma Gamma Rho members Corinne Brown and Robin Kelly and Zeta Phi Beta member Donna Edwards used social media and press conferences to campaign on Lynch’s behalf.
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.
I’m not a dog person. I prefer cats. Cats make you work to have a relationship with them, and I like that. But I have adopted several dogs, caving in to pressure from my kids. The first was Teddy, a rottweiler-chow mix whose bushy hair was cut into a lion mane. Kids loved him, and he grew on me, too. Teddy was probably ten years when we adopted him. Five years later he had multiple organs failing and it was time to put him to sleep.
When I arrived at the vet, he said I could drop him off. I was aghast. No. I needed to stay with Teddy.As the vet prepped the syringe to put him to sleep, I started sobbing. The vet gave me a couple minutes to collect myself and say goodbye. I held Teddy's paw until he died. Honestly, I didn't think I was that attached.
In her new book No One Understands You and What To Do About It, Heidi Grant Halvorson tells readers a story about her friend, Tim. When Tim started a new job as a manager, one of his top priorities was communicating to his team that he valued each member’s input. So at team meetings, as each member spoke up about whatever project they were working on, Tim made sure he put on his “active-listening face” to signal that he cared about what each person was saying.
But after meeting with him a few times, Tim’s team got a very different message from the one he intended to send. “After a few weeks of meetings,” Halvorson explains, “one team member finally summoned up the courage to ask him the question that had been on everyone’s mind.” That question was: “Tim, are you angry with us right now?” When Tim explained that he wasn’t at all angry—that he was just putting on his “active-listening face”—his colleague gently explained that his active-listening face looked a lot like his angry face.
A magnitude 7.8 earthquake struck Nepal early on Saturday, centered 10 miles below the surface, less than 50 miles from the capital of Kathmandu. At least 2,200 are already reported to have been killed by the quake and subsequent avalanches triggered in the Himalayas. Historic buildings and temples were destroyed, leaving massive piles of debris in streets as rescue workers and neighbors work to find and help those still trapped beneath rubble. Below are images from the region of the immediate aftermath of one of the most powerful earthquakes to strike Nepal in decades. (Editor's note, some of the images are graphic in nature.)
This week we have images of a Chilean volcano, migrants shipwrecked in the Mediterranean, the "Blue Forest" in Belgium, Kim Jong Un atop Mt Paektu, the Boston Marathon, Orcas hunting on a Patagonian beach, Saudi attacks on Yemen, tule elk along California's coastline, and much more.
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What's crucial to understand, as Baltimore residents take to the streets in long-simmering frustration, is that their general grievances are valid regardless of how this case plays out. For as in Ferguson, where residents suffered through years of misconduct so egregious that most Americans could scarcely conceive of what was going on, the people of Baltimore are policed by an entity that perpetrates stunning abuses. The difference is that this time we needn't wait for a DOJ report to tell us so. Harrowing evidence has been presented. Yet America hasn't looked.
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As the Washington Post and the Associated Press have reported, lawmakers in at least 15 states have proposed exempting body-cam footage from local open records laws. But the flurry of lawmaking speaks to a larger crisis: Once those millions of hours of footage have been captured, no one is sure what to do with them.
I talked to several representatives from privacy, civil rights, and progressive advocacy groups working on body cameras. Even among these often allied groups, there’s little consensus about the kind of policies that should exist around releasing footage.