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Home Publications Blogs Beat the Press Washington Post Accuses People in Washington of Doing Drugs: The Fed and Fiscal Policy

Washington Post Accuses People in Washington of Doing Drugs: The Fed and Fiscal Policy

Sunday, 21 November 2010 08:42

The lead Washington Post editorial told readers that:

"Yet buying hundreds of billions of dollars worth of federal debt in a deliberate effort to lower long-term interest rates and boost employment looks to many economists, market participants and politicians like fiscal policy by another name."

Huh? How does pushing interest rates down to boost employment look like fiscal policy? Isn't that pretty close to the textbook definition of monetary policy? Back when I was learning economics, fiscal policy was when the government directly spent money or gave tax cuts, it wasn't about making it cheaper for the private sector to borrow.

The editorial is also troubling by seeming to suggest that the Fed should no longer have a mandate to pursue full employment.

"Still, the Fed is nearly unique among central banks in the developed world in having responsibility to maximize both price stability and employment. The fact that the left can attack him for not pursuing full employment aggressively enough, while the right can accuse him of pursuing it at the risk of hyperinflation, suggests that the dual mandate piles a heavy political burden on what is and should be a nonpolitical institution."

The Post is apparently upset that Chairman Bernanke and the Fed are attracting criticism. Sure no one likes to be criticized, but why would anyone think that this is a problem? From the standpoint of an economist this boils down to the question of whether all the nasty comments directed at Bernanke are causing us to have trouble getting people to serve at the Fed. That doesn't seem to be an issue at the moment, so there is no obvious reason that criticisms of the Fed chair should bother us.

The other flaw in the Post's logic is the utterly crazy idea that taking away the Fed's mandate to pursue full employment is somehow non-political. Monetary policy has enormous impact on the level and distribution of income in society. If the Fed has a green light to ignore high levels of unemployment and it takes advantage of this option, then it will be potentially costing the country trillions of dollars of lost output.

Furthermore, since the incomes of middle and lower income workers are most sensitive to the rate of unemployment, the bulk of these losses would be endured by those at the middle and bottom of the income distribution. The negative hit to the incomes of those at the middle and bottom due to high unemployment dwarfs everything that Congress ever debates in terms of TANF, EITC, UI and just about any other tax and transfer program. It is hard to understand why anyone who believes in democracy would want to put such a central economic decision (the trade off between the unemployment rate and the risk of inflation) outside of the scope of political action.





Comments (10)Add Comment
written by skeptonomist, November 21, 2010 8:30
The idea that economics can be separated from politics and group interests is nonsensical and the dual and often contradictory mandate of the Fed is a good illustration. Preventing inflation benefits certain people such as creditors, whereas maintaining full employment benefits others. Even if an appointed agency has the power to choose between the objectives, why should this agency be intermixed with for-profit banking? During the inflation of the 70's and 80's the Fed chose to try (unsuccessfully) to prevent inflation and deliberately raised unemployment to higher nominal levels than currently. In the credit crisis of 2007-2009 the Fed obviously put the temporary stability of banks (including investment banks and also insurance companies) ahead of any other objective. Bernanke is now apparently committed to expanding money and reducing unemployment, but this may be only because the Fed recognizes that there is no real threat of inflation. What will happen if there is a disruption in oil supply and headline inflation increases again - can the Fed be trusted not to change policy?
politics as usual
written by bobbyp, November 21, 2010 8:35
It is hard to understand why anyone who believes in democracy would want to put such a central economic decision (the trade off between the unemployment rate and the risk of inflation) outside of the scope of political action.

It is not hard at all. The Post is pushing a political agenda. That they may or may not believe in democracy is beside the point.
The Enemy From Within: A Keynesian-Bernanke Fed
written by izzatzo, November 21, 2010 9:12
The war on terrorism has finally shifted to where it belongs, against Keynesian economics from within, administered no less by an all powerful appointed Fed oblivous to control by the people.

While liberals are ignorant that Keynesian policy tools include monetary and tax policy along with fiscal policy, conservatives have been well aware of this inbred economic socialism for decades.

Quantitative easing as a substitute for fiscal spending and tax cuts is one of three Keynesian tools designed to disrupt the essential foundations of capitalism at its core, throwing off balance the Invisible Gyroscopic Hand of Supply and Demand that otherwise maintains full employment and price stability at the same time.

The liberals caused this. By not readily accepting the extension of the Bush tax cuts as the preferred Keynesian policy, and by intentionally crippling Keynesian stimulus fiscal spending, Bernanke was forced to implement a poor third Keynesian substitute - quantitative easing - to steer expectations of investors away from the fear of wealth confiscation, regulation and uncertainty.

Bernanke deserves the nasty comments. Using a lesser Keynesian tool for a better one doesn't absolve him of using socialism to tamper with the exquisite balance of the Gyroscope of Capitalism Supply and Demand that feeds us all with its free market bounty. Bernanke and his Socialist Keynesian Economics has to go once and for all before recovery can begin.
Steal From the Poor and Give to the Rich
written by scott, November 21, 2010 1:34
It's perfectly explicable, as the first two commenters indicate. The Post doesn't think either fiscally or monetarily that the government should give a damn about persistent high unemployment, primarily because the people who run the Post aren't affected by that problem as a social class. They are affected by downward interest rate moves that hurt their investments and their ability to get a higher return.
the exquisite balance of the Gyroscope of Capitalism
written by eRobin, November 21, 2010 6:19
is gonna be the name of my next album
written by Ron Alley, November 21, 2010 8:46
The Fed may pursue an objective, say increased employment, by monetary policy means. Congress may pursue that same objective by fiscal measures. The Post editors may conclude that pursuit of the same objective makes monetary policy equivalent to fiscal policy. But they ignore Mr. Bernanke's recent comment to the effect that QEII is likely to be of limited effect and additional fiscal stimulus may be required to increase employment.
written by S.D. Jeffries, November 21, 2010 11:02
The problem with Mr. Bernanke's recent statement that more fiscal stimulus may be required to increase employment is that the two political parties have different ideas about the meaning of his statement. The Republicans hear a call for tax cuts, while the Democrats hear a need for more spending. Considering the Republicans will now be in charge of the House, I doubt anything but tax cuts will be proposed.
written by PeonInChief, November 22, 2010 8:07
The Post is simply picking up one of the latest talking points of the Republicans. See http://www.sacbee.com/2010/11/...ffort.html

But I've frankly never noticed that the Fed had much concern with unemployment anyway. It's run by the banks fehrevensake, and banks are always more concerned with inflation.
written by liberal, November 22, 2010 11:35
PeonInChief wrote,
It's run by the banks fehrevensake...

Anyone remember the Greenspan put
written by winstongator, November 25, 2010 4:16
It's hilarious to hear conservatives wax poetic about an overly active fed, when the real overaction was Greenspan's consistency lowering rates whenever the market hiccuped. Combine that with non-use of supervisory powers and you get a fed moving more substantively in a direction than it is now.

As for money creation, how much money were investment banks creating when they moved their collective leverage ratios up considerably? What sort of inefficiency is being caused by the fed's actions? Look at the massive inefficiency in investment towards housing and various real-estate related credit instruments and derivatives, and the inefficiency is clear.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.