There are a number of problems with Federal Reserve decision making. But one that I think has been overlooked is the problem created by having the Fed serve two somewhat unrelated roles; monetary policy and financial stabilization. This seems to have lead to a problem in its institutional structure.
Broadly, financial stabilization encompasses the regulatory aspects of the Fed that seek to ensure a stable banking system. Monetary policy, on the other hand, involves macroeconomic stabilization through demand management. As Lars Svensson has pointed out, these are different roles, with different goals, and should be managed by different public officials.
In the Federal Reserve system the monetary policy role is conducted by the Federal Open Markets Committee (FOMC). This committee is made up of the Board of Governors of the Fed (appointed by the President and confirmed by the Senate) and a rotating group of regional presidents (selected by private banks in the region).
The regional presidents tend to be more hawkish in their approach to monetary policy, reflecting the views of local banks within their regions. Appointing more dovish members to the Board of Governors should balance this out, however, in trying to negotiate the Fed's two roles, the President will often appoint regulatory and financial experts, with little experience in monetary policy. For example, currently the only two members of the Board with clear backgrounds in macroeconomics are Ben Bernanke and Janet Yellen. The rest seem to have been chosen because of their backgrounds in regulation and financial markets. (Note: Jeremy Stein gave a very good speech on Monetary Policy at Brookings recently, so maybe he knows more than his resume suggests) The regional presidents tend to generally be economists. This presumably tilts FOMC debate away from more dovish/expansionary policies, as fewer voices in the room are both economic experts and appointed by Washington.
Creating a separate Board for regulatory supervision or reserving additional seats for macro-economists could help remedy this problem.
Tuesday, 23 October 2012
Wednesday, 17 October 2012
Fact Checkers
Without getting into the weeds of Candy Crowley's mid-debate "fact check" last night, I wanted to post a quick thought on "fact checking."
Fact checkers are needed because most members of the media prefer to cover the horse race. It's easier to cover. Most readers prefer it. However, that leaves a big gap in the coverage of the substantive claims made the candidates.
Fact checkers shouldn't try to hard to evaluate if a claim is true, rather, they should provide readers with the background information and context from which they, themselves, can evaluate the truth of what a candidate said.
Giving out a certain number of Pinochio's with their pants-on-fire is gimmicky, and it takes away from they are needed for; providing the background information required for examination of the factual assertions made on the campaign trail.
Fact checkers are needed because most members of the media prefer to cover the horse race. It's easier to cover. Most readers prefer it. However, that leaves a big gap in the coverage of the substantive claims made the candidates.
Fact checkers shouldn't try to hard to evaluate if a claim is true, rather, they should provide readers with the background information and context from which they, themselves, can evaluate the truth of what a candidate said.
Giving out a certain number of Pinochio's with their pants-on-fire is gimmicky, and it takes away from they are needed for; providing the background information required for examination of the factual assertions made on the campaign trail.
Tuesday, 16 October 2012
How to Reduce Inequality
The Economist recently had an article on inequality that I found annoying. They claim to have put forth a "radical centrist" proposal to reduce inequality. Unfortunately, their proposal reads more like a lame centrist proposal, with the usual centrist talking points: school reform, eliminate deductions in the tax code, reform entitlements, etc. Their advice for third world countries is basically to discontinue poor government policies (the Chinese Hokou system, fuel subsidies).
The problem with these reforms is that they don't really have much to do with inequality. Or at least they aren't ways to attack inequality directly. Here are three ideas:
1) Let people from poor countries move to rich countries. This is the best way to reduce global inequality. When people move to the U.S. from a third world country their real income will almost always go up.
2) Use our tax system to redistribute money from rich people to poor people.
3) Use monetary and fiscal policy to reduce unemployment. When unemployment is low more people have jobs, and those who have jobs can more easily bargain for a raise.
It's fine if you don't like these ideas, or are concerned about secondary effectss. But this is how you attack inequality. The Economist just took a bunch of policies they already favor and then claimed enacting those policies is the way to reduce inequality. It's really disingenuous.
The problem with these reforms is that they don't really have much to do with inequality. Or at least they aren't ways to attack inequality directly. Here are three ideas:
1) Let people from poor countries move to rich countries. This is the best way to reduce global inequality. When people move to the U.S. from a third world country their real income will almost always go up.
2) Use our tax system to redistribute money from rich people to poor people.
3) Use monetary and fiscal policy to reduce unemployment. When unemployment is low more people have jobs, and those who have jobs can more easily bargain for a raise.
It's fine if you don't like these ideas, or are concerned about secondary effectss. But this is how you attack inequality. The Economist just took a bunch of policies they already favor and then claimed enacting those policies is the way to reduce inequality. It's really disingenuous.
Monday, 15 October 2012
Fiscal Cliff and the Upcoming Election
Jonathan Chait has a good post on the importance of the upcoming presidential election. His argument is basically that if Romney wins and the Republicans get 50 senators they will be able to use "budget reconciliation" procedures to pass the Ryan budget. Whereas, if Obama wins, because the Bush tax cuts automatically expire at the end of the year, he will plenty of leverage.
What's interesting is that it is sort of unclear at this point what Obama will use this leverage for. It would seem that the top progressive priority would be some form of cap-and-trade/carbon tax legislation. Obama could try to pair a renewal of the Bush tax cuts with a carbon tax. However, this hasn't really been discussed by the administration. My prediction is that he renews the middle class tax cuts, lets the cuts for those making over 250,000 expire, oversees the implementation of Dodd-Frank and Obamacare, and hopes that the economy is in better shape in two years and the Dems can take back the house. Environmental advocates should see this as an opportunity for Obama to push for carbon legislation.
What's interesting is that it is sort of unclear at this point what Obama will use this leverage for. It would seem that the top progressive priority would be some form of cap-and-trade/carbon tax legislation. Obama could try to pair a renewal of the Bush tax cuts with a carbon tax. However, this hasn't really been discussed by the administration. My prediction is that he renews the middle class tax cuts, lets the cuts for those making over 250,000 expire, oversees the implementation of Dodd-Frank and Obamacare, and hopes that the economy is in better shape in two years and the Dems can take back the house. Environmental advocates should see this as an opportunity for Obama to push for carbon legislation.
Tuesday, 28 August 2012
Dual Mandate
There is a lot I disagree with in Senator Corker's FT op-ed calling for an elimination of the dual mandate, but I found the part where he valorizes the Bank of England and ECB to be the most wrongheaded. The Eurozone and Great Britain are both doing terribly economically. In both cases this is largely due to their inadequate monetary policies. If we want to look to other central bank's as a way to improve our own we should be looking to those in countries that have for the most part avoided the worst of the recession--Canada, Sweden, and Israel.
Monday, 13 August 2012
Ryan is a fine VP pick
There has been some excitement from Democrats about the Ryan pick. Some feel like his budget will sink the Romney campaign because the medicare cuts are unpopular, etc. I don't think this is the case for two reasons. First, the VP pick doesn't really matter. Second, Ryan is above all a good politician. Despite voting for all the Bush spending he has been able to reposition himself as a small government conservative with conviction. I have no doubt that he will be able to explain to voters that his budget plan may have been too aggressive but he wanted to get people talking and thinking about serious entitlement reform. On 60 minutes last night him and Romney got a lot of softballs but Ryan showed that he has a real knack for answering questions slightly different from those posed to him by interviewers with a lot of detail and specifics, making it seem like he answered the question posed. He also talks fast so he seems really smart (the Sorkin effect). I might be wrong but I think its a fine pick by Romney.
Loyalty Cards
Kevin Drum has a new post as part of a back and forth with Matt Yglesias and a few other economist types about price discrimination and loyalty cards.
Drum began by making the point that those of us who are savvy enough to be getting a better price are doing so at the expense of those who are getting a worse price. Yglesias counters by arguing that everyone pays the normal price and loyalty card owners trade off the use of their consumption information for a lower price. Furthermore, any non-loyalty card price gouging is the result of a supermarket having a local monopoly--something that occurs even without loyalty cards.
I tend to side with Yglesias but I think Drum needs to focus his argument more. He doesn't really seem opposed to price discrimination in the abstract, rather he doesn't like loyalty cards specifically. His arguments seem to be 1) they don't help poor people--as the poor (and elderly) aren't necessarily the savvy consumers who take advantage of cloyalty cards; and 2) poor people can't afford to pass up loyalty card prices--so they are forced to give up personal information.
These two arguments seem somewhat contradictory but I think the bigger point is that Drum needs to make the case as to why loyalty cards should be eliminated as part of public policy. As a society we don't favor economic efficiency over all else (prostitution is illegal) and we have various consumer protection laws. If Drum made the case that these loyalty cards really are either 1) shifting costs from wealthy consumers to poorer ones; or 2) coercing people into revealing information that corporations were using in an insidious manner, then I think Yglesias and co. would agree that they should be eliminated. But he needs to actually make that case because there doesn't seem to be anything inherently wrong with the loyalty card price discrimination scheme.
Drum began by making the point that those of us who are savvy enough to be getting a better price are doing so at the expense of those who are getting a worse price. Yglesias counters by arguing that everyone pays the normal price and loyalty card owners trade off the use of their consumption information for a lower price. Furthermore, any non-loyalty card price gouging is the result of a supermarket having a local monopoly--something that occurs even without loyalty cards.
I tend to side with Yglesias but I think Drum needs to focus his argument more. He doesn't really seem opposed to price discrimination in the abstract, rather he doesn't like loyalty cards specifically. His arguments seem to be 1) they don't help poor people--as the poor (and elderly) aren't necessarily the savvy consumers who take advantage of cloyalty cards; and 2) poor people can't afford to pass up loyalty card prices--so they are forced to give up personal information.
These two arguments seem somewhat contradictory but I think the bigger point is that Drum needs to make the case as to why loyalty cards should be eliminated as part of public policy. As a society we don't favor economic efficiency over all else (prostitution is illegal) and we have various consumer protection laws. If Drum made the case that these loyalty cards really are either 1) shifting costs from wealthy consumers to poorer ones; or 2) coercing people into revealing information that corporations were using in an insidious manner, then I think Yglesias and co. would agree that they should be eliminated. But he needs to actually make that case because there doesn't seem to be anything inherently wrong with the loyalty card price discrimination scheme.
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