Wall Street economists, who often have their own financial axes to grind, tend to get a disproportionate amount of media attention. But they do not necessarily represent the discipline as a whole and can skew public perceptions of what economists generally think.
Economists can be divided into three groups: those who teach and do research at colleges and universities, those who work in government agencies and those who work in private industry. Even among the last group, only a portion work for Wall Street financial firms. But they have the greatest voice.
Two recent articles by economists less often heard from bring insights to the challenging economic situation we face, adding balance to views heard in the media.
The first is a Dec. 18 column in the Financial Times by Kenneth Rogoff, a Harvard professor who distinguished himself as chief economist at the International Monetary Fund. Earlier in his career, he served on the staff of the Board of Governors of the Federal Reserve.
Rogoff’s column, “The Fed must not play Santa Claus to the markets,” explains why Wall Street’s desire for bigger rate cuts is self-serving:
“Markets are right to be concerned about recession risks, but there is an awful lot of whining mixed in here. After all, most traders’ year-end bonuses stand to benefit a lot from an even softer Fed policy stance. The markets were not satisfied with one dessert; they wanted two.”
Later, he sums up many investors’ views of the Fed’s purpose:
“Let us face it. Most investors think a good central bank should always drive as fast as it can above the economy’s speed limit without crashing or breaking the inflation speedometer. Never mind inflated asset prices and higher inflation expectations that sow the seeds of a later crisis. As long as the benefits are here today and the risks materialize only in the future, the typical ‘streetwise’ investor wants to see the central bank keep its foot on the gas pedal.”
The full column can be read at www.ft.com.
In a recent article in the Journal of Economic Perspectives, Marvin Goodfriend looks at the same issue – how much should the Fed do? – from a 40-year perspective that reminds us just how bad things were in the 1970s and early 1980s and how monetary policy had a positive impact.
Goodfriend, an economics professor at Carnegie Mellon University, shows many good things have happened in four decades. Inflation is much lower than it was even 15 years ago in developing countries as well as rich ones. And over the past 20 years, the U.S. economy has enjoyed long expansions with only two brief recessions. In contrast, there were six recessions in between 1955 and 1985. The one in 1981-1982 was particularly harsh.
The improvement in economic stability, many economists believe, is due largely to better money-supply policies. Central banks did learn from the mistakes they made in the 1960s and 1970s. But the lesson is not permanent. Political pressures to implement short-run fixes for a slowing economy despite dangers of longer-term harm remain strong.
In a thoughtful article that can be read by noneconomists, Goodfriend outlines how Keynesian policies were applied in the 1950s and ’60s to stimulate economies by loosening restraints on money growth, and sketches the worsening of both inflation and unemployment in the 1970s. He describes the painful but unexpectedly short vanquishing of inflation in the early 1980s, when Paul Volcker headed the Federal Reserve, and gives an overview of the relative stability enjoyed since.
Goodfriend has useful experience outside academia, having served as Federal Reserve researcher and staff member on the President’s Council of Economic Advisors in the 1980s. He later put in 12 years at the Richmond, Va., Fed, in which capacity he attended Federal Open-Market Committee meetings as an adviser to the Richmond Fed president.
He is fair in his discussion of alternative points of view held by economists through the turbulent 1970s and careful in reaching conclusions. He does not directly address challenges facing the Federal Reserve since August 2007, but his insights on monetary policy all bear on current tradeoffs. You can see the whole article at www.aeaweb.org/articles.php?doi=10.1257/jep.21.4.47.
In a democracy, citizens eventually get the government they deserve. Central banks like the Fed may have statutory autonomy from political meddling, but what policies they can implement are, in the long run, circumscribed by what the people find necessary and acceptable.
The better we understand our current problems and just what a central bank can and cannot do in response, the more likely we will get prudent policies.
© 2007 Edward Lotterman
Chanarambie Consulting, Inc.