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.
A new report details a black market in nuclear materials.
On Wednesday, the Associated Press published a horrifying report about criminal networks in the former Soviet Union trying to sell “radioactive material to Middle Eastern extremists.” At the center of these cases, of which the AP learned of four in the past five years, was a “thriving black market in nuclear materials” in a “tiny and impoverished Eastern European country”: Moldova.
It’s a new iteration of an old problem with a familiar geography. The breakup of the Soviet Union left a superpower’s worth of nuclear weapons scattered across several countries without a superpower’s capacity to keep track of them. When Harvard’s Graham Allison flagged this problem in 1996, he wrote that the collapse of Russia’s “command-and-control society” left nothing secure. To wit:
Also notable about this brazen show of might is that the missiles traveled through two countries, Iran and Iraq, before hitting their 11 targets in Syria. This means that both countries either gave their permission or simply didn’t confront Putin about the use of their airspace on his birthday.
Somewhere in Europe, a man who goes by the name “Mikro” spends his days and nights targeting Islamic State supporters on Twitter.
In August 2014, a Twitter account affiliated with Anonymous, the hacker-crusader collective, declared “full-scale cyber war” against ISIS: “Welcome to Operation Ice #ISIS, where #Anonymous will do it’s [sic] part in combating #ISIS’s influence in social media and shut them down.”
In July, I traveled to a gloomy European capital city to meet one of the “cyber warriors” behind this operation. Online, he goes by the pseudonym Mikro. He is vigilant, bordering on paranoid, about hiding his actual identity, on account of all the death threats he has received. But a few months after I initiated a relationship with him on Twitter, Mikro allowed me to visit him in the apartment he shares with his girlfriend and two Rottweilers. He works alone from his chaotic living room, using an old, battered computer—not the state-of-the-art setup I had envisaged. On an average day, he told me, he spends up to 16 hours fixed to his sofa. He starts around noon, just after he wakes up, and works late into the night and early morning.
It leaves people bed-bound and drives some to suicide, but there's little research money devoted to the disease. Now, change is coming, thanks to the patients themselves.
This past July, Brian Vastag, a former science reporter, placed an op-ed with his former employer, the Washington Post. It was an open letter to the National Institutes of Health director Francis Collins, a man Vastag had formerly used as a source on his beat.
“I’ve been felled by the most forlorn of orphan illnesses,” Vastag wrote. “At 43, my productive life may well be over.”
There was no cure for his disease, known by some as chronic fatigue syndrome, Vastag wrote, and little NIH funding available to search for one. Would Collins step up and change that?
“As the leader of our nation’s medical research enterprise, you have a decision to make,” he wrote. “Do you want the NIH to be part of these solutions, or will the nation’s medical research agency continue to be part of the problem?”
“If the office is going to become a collection of employees not working together, it essentially becomes no different than a coffee shop.”
There’s plenty of research out there on the benefits of remote and flexible work. It’s been shown to lead to increased productivity, and has an undeniable benefit for work-life balance. But what does it do to everyone back at the office?
In a 2013 memo to workers explaining why the company was eliminating policies that allowed remote work, Jackie Reses, Yahoo’s head of human resources,argued that some of the “best decisions and insights come from hallway and cafeteria discussion,” and that actual presence in the office encourages better collaboration and communication.
In the name of emotional well-being, college students are increasingly demanding protection from words and ideas they don’t like. Here’s why that’s disastrous for education—and mental health.
Something strange is happening at America’s colleges and universities. A movement is arising, undirected and driven largely by students, to scrub campuses clean of words, ideas, and subjects that might cause discomfort or give offense. Last December, Jeannie Suk wrote in an online article for The New Yorker about law students asking her fellow professors at Harvard not to teach rape law—or, in one case, even use the word violate (as in “that violates the law”) lest it cause students distress. In February, Laura Kipnis, a professor at Northwestern University, wrote an essay in The Chronicle of Higher Education describing a new campus politics of sexual paranoia—and was then subjected to a long investigation after students who were offended by the article and by a tweet she’d sent filed Title IX complaints against her. In June, a professor protecting himself with a pseudonym wrote an essay for Vox describing how gingerly he now has to teach. “I’m a Liberal Professor, and My Liberal Students Terrify Me,” the headline said. A number of popular comedians, including Chris Rock, have stopped performing on college campuses (see Caitlin Flanagan’s article in this month’s issue). Jerry Seinfeld and Bill Maher have publicly condemned the oversensitivity of college students, saying too many of them can’t take a joke.
National Geographic Magazine has opened its annual photo contest, with the deadline for submissions coming up on November 16, 2015.
National Geographic Magazine has opened its annual photo contest, with the deadline for submissions coming up on November 16, 2015. The Grand Prize Winner will receive $10,000 and a trip to National Geographic headquarters to participate in its annual photography seminar. The kind folks at National Geographic were once again kind enough to let me choose among the contest entries so far for display here. Captions written by the individual photographers.
Forget the Common Core, Finland’s youngsters are in charge of determining what happens in the classroom.
“The changes to kindergarten make me sick,” a veteran teacher in Arkansas recently admitted to me. “Think about what you did in first grade—that’s what my 5-year-old babies are expected to do.”
The difference between first grade and kindergarten may not seem like much, but what I remember about my first-grade experience in the mid-90s doesn’t match the kindergarten she described in her email: three and a half hours of daily literacy instruction, an hour and a half of daily math instruction, 20 minutes of daily “physical activity time” (officially banned from being called “recess”) and two 56-question standardized tests in literacy and math—on the fourth week of school.
That American friend—who teaches 20 students without an aide—has fought to integrate 30 minutes of “station time” into the literacy block, which includes “blocks, science, magnetic letters, play dough with letter stamps to practice words, books, and storytelling.” But the most controversial area of her classroom isn’t the blocks nor the stamps: Rather, it’s the “house station with dolls and toy food”—items her district tried to remove last year. The implication was clear: There’s no time for play in kindergarten anymore.
Why Americans tend more and more to want inexperienced presidential candidates
The presidency, it’s often said, is a job for which everyone arrives unprepared. But just how unprepared is unprepared enough?
Political handicappers weigh presidential candidates’ partisanship, ideology, money, endorsements, consultants, and, of course, experience. Yet they too rarely consider an element of growing importance to voters: freshness. Increasingly, American voters view being qualified for the presidency as a disqualification.
In 2003, I announced in National Journal the 14-Year Rule. The rule was actually discovered by a presidential speechwriter named John McConnell, but because his job required him to keep his name out of print, I graciously stepped up to take credit. It is well known that to be elected president, you pretty much have to have been a governor or a U.S. senator. What McConnell had figured out was this: No one gets elected president who needs longer than 14 years to get from his or her first gubernatorial or Senate victory to either the presidency or the vice presidency.* Surprised, I scoured the history books and found that the rule works astonishingly well going back to the early 20th century, when the modern era of presidential electioneering began.
What will happen to digital collections of books, movies, and music when the tech giants fall?
When you purchase a movie from Amazon Instant Video, you’re not buying it, exactly. It’s more like renting indefinitely.
This distinction matters if your notion of “buying” is that you pay for something once and then you get to keep that thing for as long as you want. Increasingly, in the world of digital goods, a purchasing transaction isn’t that simple.
There are two key differences between buying media in a physical format versus a digital one. First, there’s the technical aspect: Maintaining long-term access to a file requires a hard copy of it—that means, for example, downloading a film, not just streaming from a third party’s server. The second distinction is a bit more complicated, and it has to do with how the law has shaped digital rights in the past 15 years. It helps to think about the experience of a person giving up CDs and using iTunes for music purchases instead.