Matt Yglesias

The Dual Oil Threats

When people talk about the risk posed to the economy by oil price spikes it’s worth keeping in mind the fact that there are really two separate threats here.

One is that expensive oil is a negative “real” shock to the American economy. Many of us use a lot of oil to go about our daily business, so expensive oil impairs that. But the other risk—larger in my view—is that higher energy prices could, by generating higher headline inflation, generate political pressure for tight monetary policy. There’s no reason that should happen. Nothing about political upheaval in Libya implies that America’s on the verge of a wage-price spiral with unemployment over 9 percent. But for months now there’s been agitation for tight money that’s seeking any kind of vaguely plausible pretext, and expensive gas might provide that pretext.

Austerity in the UK

One question raised by several commenters to my post on the impossible dream of majoritarian democracy was basically “if majoritarianism is so great, how come macro stabilization policy in the UK is so bad.” The answer, as briefly glossed by Paul Krugman here and laid out in greater detail by Ed Balls in the FT is that the Bank of England is the villain. Mervyn King first persuaded David Cameron that he ought to implement an austerity regime even more severe than the one the Tories campaigned on, helped get Nick Clegg to go along with it, and then campaigned in public in favor of the Coalition’s disastrous fiscal policies.

Bad central banking puts political authorities in a very tough place. There’s an interplay between fiscal and monetary issues. The goal of stabilization policy is to stabilize the path of overall nominal spending in the economy. Fiscal policymakers can’t really push nominal spending above the path that the central bank wants it to be on. So if King says “looser fiscal policy will force me to tighten monetary policy” then you’re in a tough pickle. Some folks, à la Scott Sumner, believe that the inverse of this is also true, that monetary targets are not only necessary but sufficient. It seems to me that King, Clegg, and Cameron were all counting on this being true. Most conventional New Keynesians—including Shadow Chancellor Ed Balls, Ben Bernanke, Paul Krugman, etc.—have had their doubts about this theory and actual events in the UK seem to be reenforcing this conventional wisdom. When the goal is to increase the volume of nominal spending in the economy you don’t want the largest spender (to wit, the government) reducing spending and raising taxes.

Price Level Targeting

Here’s Michael Woodford writing back in October about how the Fed should go beyond QE2 and embrace price level targeting to ensure maximum efficacy of monetary stimulus:

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Instead, as suggested in a recent speech by William Dudley of the Federal Reserve Bank of New York, the Fed should commit to make up for current “inflation shortfalls” due to its inability to cut interest rates. If, for example, inflation was predicted to run half a percentage point below the Fed’s target for the next two years, the Fed could announce plans to offset this by allowing an additional one per cent rise in prices after that. Once the shortfall has been made up, the Fed would return to its previous, lower target.

Critics will say this will undermine the Fed’s credibility on price stability. They are wrong because the price increases allowed under this “catch-up” policy would be limited in advance. Catch-up inflation would simply put prices back on the path they would have followed had the Fed been able to cut interest rates earlier.

Woodford doesn’t have a Nobel Prize, but he is author of a book “which has quickly become the standard reference for monetary theory and analysis among academic economists and their colleagues at central banks”. Not bad. And by coincidence there’s a seat opening up on the Federal Reserve Board of Governors.

Paul Ryan’s Limited Imagination

Everyone knows that Ron Paul has some crank notions about monetary economics, but Paul Ryan’s own crankitude on this score is badly underrated. Will Wilkinson, for example, flags this alarming quote from Ryan’s participation in a recent committee hearing with Ben Bernanke:

“Our currency should provide a reliable store of value—it should be guided by the rule of law, not the rule of men,” Mr Ryan informed Mr Bernanke. “There is nothing more insidious that a country can do to its citizens than debase its currency.”

This is reminiscent of VI Lenin’s old time claim that “the best way to destroy the capitalist system is to debase the currency.” That said, Lenin’s takeover of the Russian government led to, among other things, the Povolzhye famine of 1921 which I’d say was considerably worse than inflation. And that’s to say nothing of the worse famine of 1933 under Stalin. Closer to home, the Tuskegee syphilis experiment in which people were duped into not seeking antibiotic treatment for their illness strikes me as considerably more insidious than inflation.

The Specter of Inflation

From Annie Lowrey’s excellent profile of Ron Paul’s monetary economics:

When I asked Paul about this, he maintained the Fed has set us up for a currency crisis down the road. “It won’t be as bad as Zimbabwe,” he says. “But perhaps something like 1979 or 1980.” He noted that geopolitical events often kick of economic ones. “The revolutions in the Middle East, that could end up being the precipitating event,” he said. “Tunisia, Egypt—they may well tumble.”

From David Leonhardt:

Even better than look at current core inflation, nowadays we can look at the TIPS spread and measure market expectations of inflation over the next ten years:

The market thinks Paul is really wrong. Lowrey quotes him complaining that the Fed “sticks it to the people who want to save and make money. It is so unfair.” But there’s nothing stopping Paul or any other inflation-averse savers from investing in inflation protected securities (TIPS) that pay a guaranteed interest rate over and above the inflation rate. Indeed, if Paul’s right he and his followers will be able to make a killing in this market.

The Strange Case of Pro-Confederate Monetary Policy

Mike Konczal has a post up about Ron Paul’s monetary policy hearing today, in which he notes that one of Rep Paul’s key witnesses is a neoconfederate kook:

I like the title: does monetary policy ever really work? As for the witnesses, Thomas J. DiLorenzo is a senior fellow at the Ludwig von Mises Institute. He’s got the Lincoln stuff down pat. He appears to be best known as an author of “>Lincoln Unmasked: What You’re Not Supposed to Know About Dishonest Abe (example, see this interview:“I saw it as my duty to spread the truth about what a horrific tyrant Lincoln was…. I think secession is not only possible but necessary if any part of America is every to be considered “the land of the free” in any meaningful sense…Lincoln was almost exclusively devoted to Hamiltonian mercantilism — high protectionist tariffs, other forms of corporate welfare, a central bank modeled after the Bank of England to pay for it all, and political patronage and matching politics….The entire agenda of Hamiltonian mercantilism was put into place during the Lincoln administration — along with the first income tax, the first military conscription law, and the creation of the internal revenue bureaucracy, among other monstrosities”).

Konczal situates this in the context of the long-running feud between the supercrank libertarians of the Mises/Paul faction and the more mainstream libertarians of the Koch/Cato faction. And, indeed, the Mises crew’s obsession with the evils of Abraham Lincoln is certainly a distinctive attitude. What’s more, until very recently support of activist monetary policy to support the economy in times of depressed output was deemed an acceptably libertarian approach by Cato types. Milton Friedman, back in those days, counted as a libertarian. The interesting thing, though, is that on the subject of monetary policy the Kock/Cato people have decided the Mises faction is right and have been loudly denouncing Ben Bernanke as a socialist bound to create ruinous inflation.

Part of the story here is partisan opportunism, and part is genuine economic conversion. The point, however, is that the combination of steep recession with Barack Obama becoming president has led to the mainstreaming of demand denialism in mainstream center-right circles. This is a big shift from where things were two years ago, when people debating the merits of different demand-bolstering instruments (fiscal vs monetary, tax-side vs spending side) but agreed on the overall theory.

The actual CSA, it’s perhaps worth noting, did in fact suffer from ruinous inflation.

China’s Rate Hikes

China’s continuing efforts to curb inflation by increasing interest rates is, of course, important to Americans interested in exchange rate policy.

One point to make is that with differential inflation—faster in China than in the United States—the “real” exchange rate is changing faster than the nominal one. This means Yuan misvaluation isn’t really as bad as it seems. The flipside is that all this inflation trouble highlights the extent to which China’s refusal to revalue the Yuan really is bad for China and Chinese people as well as for American manufacturers. The most straightforward way for a country in China’s position to curb inflation would be to simply let the Yuan appreciate more rapidly. That would decrease demand for Chinese-made goods and stop the economy from overheating. It would also increase demand for goods made in the poor countries with which China competes—Bangladesh, Vietnam, etc.—and increase Chinese demand for American-made goods. Higher interest rates in the context of a fixed exchange rate is very much a “second-best” outcome.

With Inflation Low and Unemployment High, Will The Fed Step On The Gas?

Federal Reserve Chairman Ben Bernanke spoke today:

In sum, although economic growth will probably increase this year, we expect the unemployment rate to remain stubbornly above, and inflation to remain persistently below, the levels that Federal Reserve policymakers have judged to be consistent over the longer term with our mandate from the Congress to foster maximum employment and price stability. Under such conditions, the Federal Reserve would typically ease monetary policy by reducing the target for its short-term policy interest rate, the federal funds rate. However, the target range for the funds rate has been near zero since December 2008, and the Federal Reserve has indicated that economic conditions are likely to warrant an exceptionally low target rate for an extended period. As a result, for the past two years we have been using alternative tools to provide additional monetary accommodation.

Bernanke later says that in his view QE2 has been successful at pushing things in the right direction, a conclusion strongly supported by the ongoing correlation between inflation expectations and asset prices. Karl Smith is cheered.

I’m a bit less cheered.

The good news in the speech is that it indicates that Ben Bernanke has the same analysis of the situation that I have and that Bernanke had when talking about Japan in 2003. He thinks that in a depressed economy with lots of excess labor and low inflation that expansionary monetary policy can boost real output. My concern is that this always seems to have been the view of Ben Bernanke the economic analyst. But Ben Bernanke the politician has always been much less aggressive in what he delivers than what Ben Bernanke the analyst’s diagnosis would suggest. Is he outvoted on the FOMC? If so, he hasn’t done a very good job of communicating to the White House or Congress the need to send him some reinforcements.

My fear is that something about the political economy of the modern day “independent” central bank pushes it toward a deflationary bias. After all, it’s not just the Fed, it’s the Bank of Japan and the ECB, too.

Inflation and Stock Prices

Paul Krugman and Scott Sumner tout a new David Glassner paper showing a tight post-crash correlation between inflation expectations and the S&P 500 which they think illustrates the case that a demand shortfall is at the root of our economic problems:

Kevin Drum likes the conclusion but says “Sadly, neither Glasner, Sumner, nor Krugman explain in terms someone like me can understand why this correlation implies that aggregate demand is what’s behind our economic woes.” Let me take a stab at it.

If low aggregate demand is at the root of our problems, then we should be able to solve our problem through helicopter drops. Mail envelops full of dollar bills to each American household, and spending will increase. The increased spending will induce firms to increase the pace of activity, which will lead to more hiring, more real output, and a virtuous circle of higher incomes and higher demand. But Matt, you say, if it’s really possible to boost growth just by printing money and mailing it to people, why don’t governments do this all the time? Won’t that just lead to ruinous inflation?

The answer is that, yes, most of the time printing money and mailing it to people would merely lead to inflation and not do anything to boost real output. To get more real output you need more workers, or more productive workers, or better regulations, or something. You can’t just have more spending.

Back to Glasner. He uses the TIPS spread as a proxy for expectations of future inflation, and the S&P 500 as a proxy for expectations of future real economic activity. And he finds that, in general, there’s no correlation between the two. Which is exactly what you would expect to find in a scenario where you can’t boost growth just by printing money. But then comes the crash of 2008, the 2009 recovery recovery, the mini-crash of 2010, and the renewed recovery an extended period of time when inflation expectations and real growth expectations are tightly correlated. That means that the very same swings in nominal spending that push inflation up or down are also—and simultaneously—pushing real output up and down. That indicates that any measures we take to increase nominal spending, up to and including mailing envelops of newly printed dollars to random households, will mobilize idle resources and increase real economic output.

Monetary Expansion Boots Employment

Hot new macroeconomic estimates from Hess Chung, Jean-Philippe Laforte, David Reifschneider, and John C. Williams investigate the impact of the Federal Reserve’s asset purchasing program:

An analysis shows that the Federal Reserve’s large-scale asset purchases have been effective at reducing the economic costs of the zero lower bound on interest rates. Model simulations indicate that, by 2012, the past and projected expansion of the Fed’s securities holdings since late 2008 will lower the unemployment rate by 1½ percentage points relative to what it would have been absent the purchases. The asset purchases also have probably prevented the U.S. economy from falling into deflation.

The basic shape should come as no surprise. Monetary expansion raises aggregate demand. That means more employment and more inflation. If the economy is already close to full employment, extra demand mostly means more inflation. But if the economy is far from full employment, then you mostly get more employment and more output.

Relatedly, the Hamilton Project is offering $25,000 as a prize to whoever comes up with the best job creating idea. I’m not long-winded enough to stretch this out into a 5,000 word essay, but it seems to me that if monetary expansion leads to job creation in a depressed economy and the economy is still depressed, then we ought to have more monetary expansion.

Winning the Future By Reducing Idleness

The reason the USA is more economically important than Canada is that we have many more people doing work, producing goods and services, and earning incomes. The reason China is more economically important than Serbia is that China has many more people doing work, producing goods and services, and earning incomes. This is often glossed by observing that China has a “large population” but of course a large population of people sitting on the couch watching TV doesn’t help, they need to be doing something.

So it strikes me as fairly scandalous—and not just in narrow humanitarian terms—that so many Americans are sitting on the couch and scanning help wanted ads:

As the recovery continues, the economy will add roughly 2.5 million jobs per year over the 2011–2016 period, CBO estimates. However, even with significant increases in the number of jobs, a substantial reduction in the unemployment rate will take some time. CBO projects that the unemployment rate will gradually fall in the near term, to 9.2 percent in the fourth quarter of 2011, 8.2 percent in the fourth quarter of 2012, and 7.4 percent at the end of 2013. Only by 2016, in CBO’s forecast, does it reach 5.3 percent, close to the agency’s estimate of the natural rate of unemployment (the rate of unemployment arising from all sources except fluctuations in aggregate demand, which CBO now estimates to be 5.2 percent).

This is an absurd situation to be in. Does anyone seriously deny that there’s something these people could be doing that would be more useful than being unemployed? Now ask yourself this. Suppose you had more money. Would you buy more goods and services? I would. And if more people were buying more goods and services, then wouldn’t firms need to hire more people to provide those goods and services? I don’t see any way around it. So why not put some money into people’s hands so they can go out and buy more goods and services? Maybe you think we can’t do that because “the money has to come from somewhere.” But it doesn’t. It’s fiat currency, we can just make more. It’s true that if we print more and more money that at some point we’ll soak up all the idle people and it’ll start to spark inflation. And that would be an excellent time to stop trying doing it. But what’s stopping us today?

Ezra Klein says the administration’s moved past unemployment as an issue because there’s nothing more they can get out of congress. Do they know there are other macroeconomic stabilization tools at the government’s disposal? Do they think it’s a problem that those tools aren’t being used?

Paul Ryan’s Crank Monetary Economics

(cc photo by shrff)

Via Noam Scheiber, Noah Kristula-Green explores Paul Ryan’s notion that we should replace our current floating currency with one whose value is based on a basket of commodities.

The best way to think about this idea and the severe problems with it are to think of prisoners using cigarettes as a medium of exchange. A medium of exchange is a valuable thing to have, and cigarettes are an appealing option. They’re light, small, largely non-perishable and have an “intrinsic” value to addicts. But once you have a whole cigarette-based economy, your problem is that this economy becomes subject to external shocks based on the supply and demand for cigarettes. If a bunch of heavy smokers suddenly get sent to your prison, demand for cigarettes skyrockets and the cigarette-denominated price of everything drops severely reducing real output as everyone enters a downward spiral of cigarette hoarding. Alternatively, the introduction of Nicorette into the prison might create declining demand for cigarettes and inflation.

In a fiat currency regime, if demand for dollars goes up you print more dollars. If inflation becomes problematic, you reduce the quantity of dollars. In a commodity-based regime, this doesn’t work. If China grows 8 percent per year and that drives up demand for the commodities to which your currency is pegged, then you get deflation. If entrepreneurs discover a much cheaper way to run mines, then you get inflation. Now if you happen to be operating in a low-trust environment like a prison these downsides may be small relative to the logistical hurdles involved in setting up a central bank. But if you already have a functioning central bank and a widely accepted currency, it’d be kind of crazy to give it up and revert to prison conditions.

Bill Kristol, Gold Bug

One of the really shocking things about the modern American conservative movement is that it contains many influential figures whose thinking about public policy is of lower quality than Bill Kristol’s. His latest notion is that we should side with China against Ben Bernanke and then adopt a gold standard:

China hawks and American hegemonists (I’m both) will be tempted to jump on this statement as a challenge to the U.S., which in a way it is. But it’s worth overcoming for a minute our (justified) distaste for the Chinese regime, and pausing to ask this: Isn’t Hu in this one respect right? And does the current international currency system of fiat money, with the U.S. as the reserve currency, serve U.S. or world interests?

And it’s worth further asking–as more and more people are beginning to ask–whether a modernized international gold standard, which anchors currencies to a standard outside government manipulation, wouldn’t better serve the interests of free and limited government both at home and abroad. After all, it’s the dollar’s status as a reserve currency that has allowed the U.S. government to amass huge debts, debts which the legislatively imposed debt ceiling has been unsuccessful in limiting. Fiat currency seems to be related to bloated and unlimited government, and to speculative bubbles, and to international instability. Do we just to have to live with this, or simply hope for better Fed chairmen?

If Kristol seriously thinks there were no asset price bubbles or market panics before FDR took us off the gold standard, then he really needs to think harder. Like how did FDR get elected? And why did he take us off the gold standard?

But beyond the specific facts, it’s the logical structure of the argument that’s insane. Economic growth is a key predicate for an expansive welfare stare. So it’s completely true that if you just started throwing out the key institutional features of modern market economies that you’d strange big government. But you’d be strangling big government by destroying the economy. Why do this? It’s like economic conservatism as a religion, with small government a totem to worship at.

Do People Know What Powers The President Has?

I’ve seen a lot made of the fact that Peter Baker’s long article on Obama and the economy doesn’t talk about housing, foreclosures, or HAMP. But that’s not all it doesn’t talk about! It doesn’t talk about the Federal Reserve, and the President’s powers to appoint its Chairman and Board of Governors.

But this crew—the Federal Reserve System in all its agencies—is the arm of the federal government that has primary responsibility for fighting recessions. The greatest power the president has to influence short-term economic performance is his ability to staff the Fed. Obama acted swiftly to reappoint Ben Bernanke as Chairman and acted very slowly to nominate anyone to serve on the Board of Governors. This has to be part of any discussion of the President’s efforts to deal with the economy. Did nobody ever bring it to his attention that he should fill these vacancies?

Jobless Recoveries and the Social Contract

Over the weekend, Kevin Drum blamed “jobless recoveries” on the collapse of the American social contract:

[I]n the past, holding onto workers through a recession was simply part of the social contract. Economically, it didn’t make any more sense in 1955 than it does today, but firms did it anyway because it was expected of them. In union-dominated industries, contracts demanded this kind of behavior. In non-union industries, corporations did it as a way of keeping unions at bay (since unions had a much easier time organizing industries that provided lousy benefits). And white collar industries didn’t feel that it was right to treat their workers worse than blue collar workers were treated. All of this conspired to create a social custom that bound workers and firms together.

This all evaporated in the 80s, of course, as younger workers largely got tired of dedicating themselves to a single company for life and corporations didn’t feel like they could compete with rivals who were more ruthless about downsizing. As a result, workers are now fired much more quickly during downturns and hired back more slowly during recoveries. It’s no coincidence that we first saw this pattern following the 1991 recession. It’s just one more example of economic behavior which is, technocratically speaking, more efficient, but in which the benefits of that efficiency flow pretty much entirely in only one direction.

Putting my neoliberal sellout hat on for a second, the case for flexibility that Drum’s leaving out would seem to be this. If you’re an employer who’s seen as having a social obligation to not let your workers go even if it’s economically rational to do so, this is going to make you more reluctant to add new workers even if it’s economically rational to do so. In the social contract between employers and employees, one party—the not-yet-employed—is cut out of the deal.

But then comes the punchline:

In the post-1980 policy regime, the business cycle has oscillated less frequently, but the depths of the recessions have seen higher-than-ever unemployment and the labor market peaks have become less impressive. And this, I think, is the real breakdown of the social contract. The idea of more flexible labor markets is that the “insiders” lose at the expense of the “outsiders” and the bosses only actually benefit in the short-term because profits tend to be competed away. But we have more outsiders than ever thanks to a Federal Reserve system that’s very good at preemptively choking off inflation but not so good at preventing recessions. As of 2007, the story was that we’d achieved a “Great Moderation” of the business cycle via this combination of flexible labor markets and cautious monetary policy, but obviously that’s not a viable characterization of the situation today.

Paul Krugman says the issue is in part that “engineering a recovery from postmodern recessions is much harder than engineering a recovery from a recession more or less deliberately inflicted by the Fed” but another way to put this might be that the Fed simply hasn’t been doing a very good job. There’s plenty of research out there, a fair amount of it by Krugman himself, about dealing with these “postmodern” recessions and the FOMC hasn’t really done what the research suggests is necessary.

The Stopped Clock

Reading over the just-released full 2005 FOMC transcripts I note that Kansas City Fed President Thomas Hoenig consistently seemed to feel that his colleagues were underestimating inflation risks.

I wonder if it ever bothers the longest-serving Fed President that this is what he always says and that he’s never been right. If I kept making the same prediction, year after year, for two decades and was invariably wrong I’d start to wonder. Doesn’t this bother him? Doesn’t it bother the Kansas City Fed’s Board?

Who Hoovers Whom?

Kevin Drum’s sticking to his theory that big finance is stealing our money:

Well then, I have to ask yet again: where is this tsunami of money coming from? If financiers receive a greater fraction of national income than they did in the past, somebody else is getting less. That somebody is almost certainly you and me, whose wages haven’t kept up with economic growth, thus creating a huge and growing pool of extra money for the financiers to hoover up.

I continue to think this model is a mistake. A lot of different things have happened over the past thirty years. One is a tendency toward financial deregulation and skyrocketing high-end inequality, and one is a tendency toward median wage stagnation. The former trend is largely concentrated in Anglophone countries, but the latter exists in Japan, Germany, etc., as well.

This ILO data only covers ten years, but highlights that wage stagnation is a pretty broad trend:

I think what Kevin’s story keeps missing is a plausible causal account of how a tiny number of financiers have been able to hoover up money from the median wage earner. I can tell you a story about how a tiny number of financiers have been able to hoover up money from the executives of rival financial institutions as deregulation has led to consolidation of the industry. I can tell you a story about how a tiny number of financiers have been able to hoover up money from the broad class of rich people in the 80th-99th percentile who own the bulk of the financial assets in the country by swindling them. I can tell you a story about how a tiny number of financiers have been able to hoover up money from the broad class of rich people via the income tax and “bailouts.”

But the median wage earner seems harder to me. Especially because they somehow got to the median German wage earner, but not to the median Chinese wage earner.

Here’s another story. A lot of the median wage earner’s money has been hoovered up by the health care system. If we had single payer health insurance in the United States then increases in per capita health care spending would exhibit themselves as higher taxes. Instead, most people get health care through employers who subsidize their premiums, so increases in per capita health care spending exhibit themselves largely as lower wages. Optimistically, in exchange for all this extra money we’re now getting way better health care. Pessimistically (and, I think, more plausibly) an awful lot of it is getting “hoovered up” to little good end.

The last part of my story is monetary policy. It used to be the case that monetary policy errors were two-sided. Sometimes wages grew too fast (inflation) and sometimes they grew too slowly (recession), but since 1980 we’ve only ever erred in one direction and experienced three labor market recessions and zero outbursts of inflation. In an ideal world, monetary policy never errs and you have neither recessions nor inflation. But if monetary policy errs in an unbalanced direction, how can wage stagnation not result?

Fed Tilting Stronger Toward Disinflation

Given that for the past three years the country has consistently experienced an unusually high level of unemployment, and unusually low rate of inflation, and unusually low level of aggregate demand it seems to me that the Federal Reserve should alter its policies to be less worried about inflation and more concerned that low AD is leading to low output and high unemployment. Certainly given that we’re looking at a changeover in members of the Fed’s Open Market Committee one would hope for new FOMC members who are skeptical of the status quo and eager to see more growth and more demand. Instead, Sewell Chan reports that we’re getting the reverse:

One is an economist who fears that the Fed’s easy-money policies could lead to manias like the housing bubble that burst in 2007. Another is a Texas Democrat who served in the Clinton White House, but is wary of the Fed’s aggressive efforts to combat unemployment. A third is a precocious economist who graduated from Princeton at 19. And the fourth is the only one who agreed wholeheartedly with the Fed’s chairman, Ben S. Bernanke, that the economy was at risk of falling into a dangerous cycle of deflation last summer and that an additional monetary boost was needed.

Peter Diamond, meanwhile, remains in limbo.

As I’ve said many times, I think Barack Obama’s administration has made many fewer errors than most of its critics on the left and the right believe. But part of what that means is that some of the errors it has made have been much more serious than is conventionally recognized. Failure to appreciate the importance of the Federal Reserve and the need to get good people confirmed in a reliable manner is very high on the list of errors.

The Wage Decline

Alan Blinder is excellent:

When it comes to wages, the basic story of recent decades is redolent of Scrooge. Real average hourly earnings (excluding fringe benefits) now stand roughly at 1974 levels. Yes, that’s right, no real increase in over 35 years. That is an astounding, dismaying and profoundly ahistorical development. The American story for two centuries was one of real wages advancing more or less in line with productivity. But not lately. Since 1978, productivity in the nonfarm business sector is up 86%, but real compensation per hour (which includes fringe benefits) is up just 37%. Does that seem fair?

Not to me. But I think that progressive discussions of this phenomenon wind up overcomplicating things when contemplating the causes. Over the past 30 years the Federal Reserve has proven itself to be much better at preventing inflationary episodes than at preventing recessions. There’s no long-term tradeoff between inflation and unemployment. A perfect central bank should be able to produce full employment and price stability all the time. But no real central bank is perfect. And what the Fed has done for 30 years is err on the side of letting aggregate demand get too low. Sluggish median compensation growth is a straightforward consequence of this decision.

Disinflation Forever!

On the subject of targeting the forecast, via Mark Thoma the Cleveland Fed has a nice chart of the evolution of inflation expectations over time:

This looks to me like expected inflation was undesirably high in the first half of the 1980s, so the monetary authorities took steps to bring it down. And then they just . . . kept on taking steps to bring inflation expectations down. Why do this? Was there some big problem in 1997 that we had to solve? Or 2002? The trend here is subtle enough that you can miss it, but implicitly American monetary policy seems to be consistently disinflationary without specifically articulating this goal or offering a reason for it.