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.
King's famous "Letter from Birmingham Jail," published in The Atlantic as "The Negro Is Your Brother" and excerpted below, was written in response to a public statement of concern and caution issued by eight white religious leaders of the South. It stands as one of the classic documents of the civil-rights movement.
While confined here in the Birmingham city jail, I came across your recent statement calling our present activities "unwise and untimely." Seldom, if ever, do I pause to answer criticism of my work and ideas. If I sought to answer all of the criticisms that cross my desk, my secretaries would be engaged in little else in the course of the day, and I would have no time for constructive work. But since I feel that you are men of genuine good will and your criticisms are sincerely set forth, I would like to answer your statement in what I hope will be patient and reasonable terms.
I think I should give the reason for my being in Birmingham, since you have been influenced by the argument of "outsiders coming in"
Is there room in the movement for people who morally object to abortion?
Updated on Monday, January 16 at 4:05 p.m.
Pro-life women are headed to D.C. Yes, they’ll turn out for the annual March for Life, which is coming up on January 27. But one week earlier, as many as a few hundred pro-lifers are planning to attend the Women’s March on Washington, which has been billed as feminist counterprogramming to the inauguration.
With organizations like Planned Parenthood and NARAL Pro-Choice America co-sponsoring the event, pro-life marchers have found themselves in a somewhat awkward position. What’s their place at an event that claims to speak for all women, but has aligned itself with pro-choice groups? With roughly a week to go before the march, organizers also released a set of “unity principles,” and one of them is “open access to safe, legal, affordable abortion and birth control for all people.”
The president-elect described NATO as “obsolete,” called the EU “basically a vehicle for Germany,” and said other countries would follow the UK's lead and leave the bloc.
President-elect Donald Trump hasn’t been shy about sharing his views about the world, in general, and Europe, in particular. He was criticized during the presidential campaign for questioning the value of NATO, praising the U.K.’s decision to leave the EU, and linking terrorist attacks to the million or so asylum-seekers who have arrived in Europe since 2015. Trump’s supporters and political analysts attributed those comments to campaign-season rhetoric, and said he would pivot on these and other issues before the general election. But with less than a week before the inauguration at which he’ll be sworn in as the 45th president of the United States, Trump gave a joint interview to The Times (of London) and Bild, the mass-circulation German tabloid, during which he described NATO as “obsolete,” called the EU “basically a vehicle for Germany,” and said other countries would follow the U.K.’s lead and leave the bloc.
A history of the first African American White House—and of what came next
In the waning days of President Barack Obama’s administration, he and his wife, Michelle, hosted a farewell party, the full import of which no one could then grasp. It was late October, Friday the 21st, and the president had spent many of the previous weeks, as he would spend the two subsequent weeks, campaigning for the Democratic presidential nominee, Hillary Clinton. Things were looking up. Polls in the crucial states of Virginia and Pennsylvania showed Clinton with solid advantages. The formidable GOP strongholds of Georgia and Texas were said to be under threat. The moment seemed to buoy Obama. He had been light on his feet in these last few weeks, cracking jokes at the expense of Republican opponents and laughing off hecklers. At a rally in Orlando on October 28, he greeted a student who would be introducing him by dancing toward her and then noting that the song playing over the loudspeakers—the Gap Band’s “Outstanding”—was older than she was.
Why some people are withdrawing from mainstream society into “intentional communities”—and what the rest of the country can learn from them
VIRGINIA— For the last eight years, Nicolas and Rachel Sarah have been slowly weaning themselves off fossil fuels. They don’t own a refrigerator or a car; their year-old baby and four-year-old toddler play by candlelight rather than electricity at night. They identify as Christian anarchists, and have given an official name to their search for an alternative to consumption-heavy American life: the Downstream Project, with the motto to “do unto those downstream as you would have those upstream do unto you.”
As it turns out, exiting the system is a challenging, time-consuming, and surprisingly technical process. Here in the Shenandoahs and central Virginia, a handful of tiny communities are experimenting with what it means to reject the norms of contemporary life and exist in a radically different way. They seem to share Americans’ pervasive sense of political alienation, which arguably reached an apotheosis with the election of Donald Trump: a sense of division from their peers, a distrust of government. The challenges of modern politics—dealing with issues like climate change, poverty, mass migration, and war on a global scale—are so vast and abstract that it’s difficult not to find them overwhelming. But instead of continuing in passive despair, as many Americans seem to do, the people in these communities decided to overhaul their lives.
A new study shows that the disproportionate imprisonment rates faced by people of color contribute to race-based inequalities in educational attainment.
In the summer of 1963, Martin Luther King Jr. delivered the closing remarks at the March on Washington. More than 200,000 people gathered to cast a national spotlight on and mobilize resistance to Jim Crow, racist laws and policies that disenfranchised black Americans and mandated segregated housing, schools, and employment. Today, more than 50 years later, remnants of Jim Crow segregation persist in the form of mass incarceration—the imprisonment of millions of Americans, overwhelmingly and disproportionately black adults, in local, state, and federal prisons.
The U.S. incarceration rate is more than five times higher than that in most of the world’s nations, despite a crime rate that’s comparable to other politically stable, industrialized countries. And among the swelling number of incarcerated men and women is a vast number of parents. In 2015, The Atlantic’s Alia Wong highlighted a study from Child Trends that found that one in nine black children has had a parent in jail or prison, about twice as high as that for white children. For black adolescents ages 12 through 17, it’s nearly one in seven. Predictably, this has implications for America’s classrooms.
Narcissism, disagreeableness, grandiosity—a psychologist investigates how Trump’s extraordinary personality might shape his possible presidency.
In 2006, Donald Trump made plans to purchase the Menie Estate, near Aberdeen, Scotland, aiming to convert the dunes and grassland into a luxury golf resort. He and the estate’s owner, Tom Griffin, sat down to discuss the transaction at the Cock & Bull restaurant. Griffin recalls that Trump was a hard-nosed negotiator, reluctant to give in on even the tiniest details. But, as Michael D’Antonio writes in his recent biography of Trump, Never Enough, Griffin’s most vivid recollection of the evening pertains to the theatrics. It was as if the golden-haired guest sitting across the table were an actor playing a part on the London stage.
“It was Donald Trump playing Donald Trump,” Griffin observed. There was something unreal about it.
When it comes to basic policy questions such as the minimum wage, introductory economics can be more misleading than it is helpful.
In a rich, post-industrial society, where most people walk around with supercomputers in their pockets and a person can have virtually anything delivered to his or her doorstep overnight, it seems wrong that people who work should have to live in poverty. Yet in America, there are more than ten million members of the working poor: people in the workforce whose household income is below the poverty line. Looking around, it isn’t hard to understand why. The two most common occupations in the United States are retail salesperson and cashier. Eight million people have one of those two jobs, which typically pay about $9–$10 per hour. It’s hard to make ends meet on such meager wages. A few years ago, McDonald’s was embarrassed by the revelation that its internal help line was recommending that even a full-time restaurant employee apply for various forms of public assistance.
Today in shoesplaining: Until your career is at its height, ladies, maybe you should stick to flats.
It went like this. At a reverse-demo event in New York last night, Jorge Cortell, the CEO of the healthcare startup Kanteron Systems, noticed a female attendee wearing shoes. He snapped a picture of the shoes. He then tweeted the picture of the shoes. This is what he said:
Sexist! the people cried. No, it's not! Cortell responded. His #brainsnotrequired musings were merely protective, he explained, of the health of the shoe-wearer. And, by extension, of the health of us all. Heels are dangerous. Heels are dumb. High-heeled shoes are not, as it were, "sensible shoes."
But forget about technology and trade for a moment. There is a more human story to tell about middle class woes. It's a story about marriage.
Imagine the Typical American Family: Married, living together, with at least one kid under 18. That family earned a median income of $81,000 last year, as Ben Casselman showed with new Census data. That's a fine income, and it's growing, if slowly, even after you adjust for inflation.