Scott Grannis pretty clearly thinks that the Federal Reserve Open Market Committee has worn out its welcome:
When all is said and done, the Fed has but one job: to keep the demand for money in line with the supply of money. When the supply of money exceeds the demand for it, inflation is the result, as Milton Friedman taught us long ago and which the experience of the past several years shows us. (I should add that, according to their official mandate, the Fed is also charged with maintaining full employment, but we’ll put that aside, especially since they now hint that they won’t feel comfortable until they see the economy weaken significantly.)
Beginning early last year, the demand for money fell even as the supply of money (best measured by M2) continued to rise. It’s no wonder that inflation rose. In fact, rising inflation confirmed that the demand for money was failing to keep pace with the supply of money. But beginning about 6-8 months ago, when (not coincidentally) the Fed started to raise interest rates, inflation started to decline. This, we know now, was early evidence that the demand for money stopped falling, while at the same time the M2 money supply started shrinking. My recommendation to the Fed, therefore, has been to give the economy time to adjust—they had done plenty enough.
concluding:
Does the Fed really want to crush the housing market by hiking rates further? I think they will come to their senses pretty quickly and back off of their recently-announced tightening pledge. The demand for money is soaring and that means inflation will continue to decline. Nobody needs higher rates right now.
IMO the Federal Reserve governors are making a powerful argument they should be replaced by robots. Consider this graph (sampled from this FRED blog post):
That’s an imperfect indicator of what would have happened, of course, since it doesn’t take into account the effects of action. But notice in particular the period from 2000 onwards. Had the Taylor Rule been followed the fed funds rate would have been adjusted earlier and in all likelihood we would have been saved from the misery created by the Fed’s tardiness.
I think that’s pretty clear evidence that the decision not to adhere to the Taylor Rule is a political one rather than a technical one. Is anyone else bothered by technocrats being enlisted to make political judgments?
“IMO the Federal Reserve governors are making a powerful argument they should be replaced by robots.
You Friedmanite, you.
Rules based policy (eg Taylor Rule) is criticized as 1) too crude a tool, 2) always mistimed, 3) always overdone, in both directions, and 4) insufficient in extraordinary circumstances.
Consider those. It is to laugh. The real FROM does exactly that in spades, with extremely rare exceptions, which are probably luck. Add to that political pressure which make every circumstance extraordinary and you have a recipe for a dismally substandard policy tool. The empirical results are not surprising. The costs tremendous.
The FROMC suffers from unwarranted arrogance and a lust for power. Pretty much standard fare for government.
Kevin Drum also thinks the fed is going too far, and I think he has a good argument.
https://jabberwocking.com/inflation-has-practically-disappeared/
Drum has a lengthier explanation:
https://jabberwocking.com/how-long-does-it-take-interest-rates-to-affect-inflation-about-a-year-or-so/
I don’t really know enough to evaluate this adequately, but my sense is that the Fed acted too late and is acting on the back side of the wave.
Again look at the graph. From 2010 through 2016 the Taylor Rule pretty clearly signaled they should raises rates. They knew that. Why didn’t they? The only explanations I can come up with are that they thought they were smarter or political.
No one wants to be party-pooper. And particularly on the left, there was the idea that the main problem with the economy was the lack of stimulus.
One of our many political problems is that ideologues on left and right have equal and opposite beliefs that have the force of Sacred Writ. For the left it’s that government spending is always stimulating to the economy. For the right it’s that tax cuts always pay for themselves in the form of economic growth.
The empirical evidence is that both government spending can stimulate the economy and tax cuts can pay for themselves through growth under specific circumstances, fiscal stimulus when there’s a shortfall in demand and excess aggregate supply and tax cuts when you’re on the appropriate side of the “Laffer curve”. NEITHER are true now.
“For the right it’s that tax cuts always pay for themselves in the form of economic growth.”
I think that’s far too simplistic, Dave. The real issue is who is best capable of using their dollar economically most efficiently, the public or private sector? Public sector expenditures are a necessary part of a civilized society, but are almost without exception very inefficiently allocated.
What significant social ills have been solved in our lifetimes through large and continual public expenditures? Compare the total size of the US government to large economies like, say, Germany, Japan or the UK. Which produces more useful output?
Drew: I think that’s far too simplistic
“When this [tax cut] really kicks in we’ll start paying off that debt like water.†– President Trump
“I’ve said at 3% economic growth this tax plan will not only pay for itself but in fact create additional revenue for the government.†– Treasury Secretary Steven Mnuchin
Drew: Public sector expenditures are a necessary part of a civilized society, but are almost without exception very inefficiently allocated.
Frequently, so are private sector expenditures (e.g. Musk buying Twitter, Zuckerberg investing in the Metaverse).
Drew: What significant social ills have been solved in our lifetimes through large and continual public expenditures?
Social Security and Medicare are continuing public expenditures that are widely seen as having important social benefits.
Drew: Compare the total size of the US government to large economies like, say, Germany, Japan or the UK. Which produces more useful output?
Country, Government expenditures as percentage of GDP
Germany, 51
Japan, 47
United Kingdom, 50
United States, 46
Since you added in continual it has solved or made better, in no particular order.
Food safety
Education
Public health including vaccines (OWS funded covid vaccine as one example), sewers, communicable diseases, etc
Police
Fire department
Roads, bridges
Basic science research
Safety net for disabled
Steve
Simplistic it may be but Republicans have been claiming that for the last 40 years, notably Trump in defending his tax cuts (as Zachriel noted).
Here are some major accomplishments of the federal government through sustained funding within my lifetime:
– the Interstate Highway system
– rural electrification
– seniors no longer impoverished by healthcare
That said this:
is a pretty good statement of my views. I differ from progressives in that I don’t think that if a little spending is good more would necessarily be better. Examples abound. We’ve reached the point of diminishing returns to scale for the Interstate Highway system. Every city of 50,000 people already has reasonably convenient access to an interstate.
I opposed the structure of the Medicare system. I thought a better model would have been the VA—clinics for the elderly operated by the federal government. Stronger focus on the elder poor. As I foresaw it has become a monster. Without a commitment to containing costs Medicare for All is impossibly expensive.
And Zachriel already responded with my immediate reaction to your point about Germany, Japan, and UK. We don’t get the bang for the buck from government spending that Germany, Japan, and the UK do. I attribute that to lack of social cohesion. I would be interested in other explanations.
Add this. NO Republican president over the last 50 years has actually decreased the size of the federal government or federal spending. What they HAVE done is increased the debt. Within my lifetime debt to GDP has gone from 30% to more than 100%. We need at least one political party that stands for fiscal responsibility. Right now we have none.
The alternative to Medicare would be private insurance if we weren’t going to do something like the VA. In which case everything would be 20%-30% more expensive and/or lots of people would not receive care.
” I don’t think that if a little spending is good more would necessarily be better. ”
While saying that the GOP always wants tax cuts is probably true I think it a bit cartoonish to say that Dems support more spending just for the sake of spending. However, they always have a next project. In the ideal what we would have is a rough balance between our revenue and expenditures so that we could use willingness to pay as a metric for how much people want to fund the new projects. Instead we tend to get the new projects funded for a short while followed by tax cuts when GOP takes over so it looks like people are getting the services for free when in reality it just gets added on to the debt.
Also, on the original topic I am having a bit of hard time believing that all inflation is the same. Inflation due to acute supply side shortages dont really seem to be the same as when too much money has been dumped into the economy. On paper I think you can make the math work the same for both but it certainly doesnt feel the same.
Steve
That’s what I mean. There is no “this far and no farther”, no limiting principle.
and that debt overhang constrains economic growth making us less able to pay.
Here’s a pretty good podcast I listened to today talking about the Fed.
https://thedispatch.com/podcast/dispatch-podcast/inflation-recession-and-the-fed/
This is likely confirmation bias talking, but it largely agrees with my sense that the fed was way too slow to stop the easy money, and now is overcompensating and hitting the brakes too hard.