Matt Yglesias is a columnist and editor for the news website Vox, which he co-founded in 2014. He joins Macro Musings to talk about the politics shaping Fed policy and also shares his thoughts on where the left and right stand on monetary issues. Read the full episode transcript: Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected] David Beckworth: Matt, welcome to the show. Matt Yglesias: Hi. I'm glad to be here. Beckworth: We're glad to have you one, we follow your work. You've written a lot about Fed policy and the blogosphere and other places since the crisis began, so it's great to interact with you. I want to begin as I do with most of my guests and ask, how did you get
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Matt Yglesias is a columnist and editor for the news website Vox, which he co-founded in 2014. He joins Macro Musings to talk about the politics shaping Fed policy and also shares his thoughts on where the left and right stand on monetary issues.
Read the full episode transcript:
Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].
David Beckworth: Matt, welcome to the show.
Matt Yglesias: Hi. I'm glad to be here.
Beckworth: We're glad to have you one, we follow your work. You've written a lot about Fed policy and the blogosphere and other places since the crisis began, so it's great to interact with you. I want to begin as I do with most of my guests and ask, how did you get into this area? And I find this particularly an interesting question for you because monetary policy is hard. In fact, one of the reasons we do this podcast is to more aware it create more awareness for macro, but you've kind of worked your way into it. So that's quite a feat. So tell us how you did it and what was your journey like?
Yglesias: So the start for me was actually a pretty obscure book that came out in the middle odds before the financial crisis, when this was really way off the radar. And I don't know how it got into my hands, but it's a book by Dean Baker and by Jared Bernstein and it's called the Benefits of Bull Employment. When markets work for people. And it's a book that it's not in any way a technical book about monetary policy, but it's basically about the experience of the late 1990s when the Greenspan Fed for I think reasons that we still don't fully understand decided to let the economy run a little hot in a way that we haven't otherwise seen since the 1970s. And the book is making the case that this had some really broad social benefits. The kind of thing was safe. Progressive people in particular should care about that.
Yglesias: It's particularly good for African Americans, for Latinos. It's particularly good for people who had criminal records or other kinds of social problems getting them into the labor market. And their argument is essentially that it has been a mistake for progressive minded people to sort of leave these monetary issues off the table and to treat it as a nonpolitical, purely technical discussion that there were risks to what Greenspan spend in the late nineties, but there were also benefits to it. And that people who care about politics and people who care about the stuff of politics should take an interest in this and should be engaged on it. I was very impressed by that book was not a timely or newsworthy kind of subject. But I always remembered it. And then when the financial crisis hit and suddenly the Fed was much more on everybody's cross hairs, it's unlit stuck with me. And I remember asking in 2009 Obama administration officials, why aren't you filling these federal reserve vacancies?
Yglesias: Like what do you think? And their answers were very... it was just sort of vague. It was like they had a lot of work to do. They had a lot of stuff to get going and they didn't think it was that important. They didn't have the view that this was a pressing political matter. They thought Ben Bernanke was a very smart, very well qualified guy, that he was doing the best he could, that they had a lot of other problems on their plate and that they were going to work on those. And that struck me as a mistake at the time. And the more I wrote about it, the more I came to think there was a big error being made there.
Beckworth: So the 2008 crisis kind of galvanized your interest, which was already founded on this book.
Yglesias: Yeah, exactly. I think everybody started paying more attention to the Fed when it took such a central stage in sort of economic policy. It had been sort of hiding in the background. I think people involved in financial markets and macro economists knew was important, but Ben Bernanke became a much more recognized figure all of a sudden. But I felt, and I still feel that people really sort of misunderstood the role of the Fed in the economy and the role of the political system in generating those outcomes.
Beckworth: Yes. And I completely agree with that. There's still a lot of learning and educating to do on monetary policy issues, both the left and the right. A little bit later we'll talk about the right, but right now it's interesting to have you on the program because you can share some perspective based on some of the work you've done. You've worked for the American Prospect, the Center for American Progress, which I think I'm fair and calling progressive left leaning organization. Is that fair? Okay. Given that's the case, you've kind of had an inside view on what the political left thinks about monetary policy. How important is it to them? So I know you've been beating the drums, we need to be on top of this, but what is your sense of the left in general, their interest in Fed policy since 2008?
The Left and Fed Policy
Yglesias: Yeah, I mean this was a striking thing to me. I was working for think progress, which is a project that center for American progress dies in 2009, 2010 sort of crying crisis type years. And they didn't think anything. As this is a big institution. They do a lot of stuff. Some stuff that's more political, some stuff that's more policy. But on the policy side, they didn't have anything cooking on monetary policy. It wasn't that they had ideas that I thought were bad. They had no ideas. Nobody who was on staff as a policy expert focused on those topics. Even as really as a significant sideline, they had a clear agenda on climate change. They had a clear agenda on LGBT equality. They have a clear point of view on taxes, on education and all kinds of things.
Yglesias: On monetary issues absolutely not. It was just sort of not something that was considered important to them. I noticed conservative groups American enterprise Institute, Cato Institute tried to play in this realm a little bit more. And since the crisis we've seen Mercatus Institute get more involved and all support games has started at a significant program that focuses on monetary policy. But the more sort of ideological center left groups still really have, but just a kind of a programmatic void there. I think they are just positively disposed toward Janet Yellen as a kind of a person. She's done one for up Obama but in there, but they don't have a strong viewpoint that they're trying to push.
Beckworth: What about the Fed Up movement? Where did that originate in? Is it making any inroads?
Yglesias: Yeah, I think that's very interesting. I mean it's good center for popular democracy, which is a progressive group, got some money put together to start a little program focused on monetary issues. Very much an activist type organization that tries to get people interested in that as a drum up some attention. We're full employment policies. I find that to be very encouraging. But it still leaves actually at a gap between in a sort of full spectrum political movement. You need some level of just kind of like boring guys doing their white papers. We ought to queue and there hasn't been interest in creating that and there hasn't been a ton of take up of Fed-Up kind of issues. It's also been interesting to see like any activists. They try to push or a variety of different things and they see what catches on with people. And I think their experience has been that when they talked about sort of diversity issues at the fed, they actually got a lot of people interested in that and they wound up leaning a little more on that.
Yglesias: We had no African-American governors. I believe that's changing now. And then there was a lot of interest in that. There's interest in bank regulation aspects getting that stuff right. I mean I do think having an appropriately diverse group of decision makers could ultimately improve monetary policy outcomes, but they were struggling to get constituents who were interested in that. Just the kind of core topic of, is the Federal Reserve doing enough to promote a labor market recovery? And that was at a time when people had been really obsessed with the state of the labor market. As things improve, I think it's natural that attention has drifted off that kind of stuff. But in 2013, 2014 mean people were still rightfully very alarmed about the state of the labor market but not that focused on the primary institution that we've created to be responsible for the health of the labor market.
Beckworth: Well that's interesting. So Fed Up is more of an activist group or the images I see a bit or like t-shirts that save what recovery question Matt kind of get in your face. I know they were at the Jackson whole meeting, had a meeting with Janet Yellen. But what you're saying is there needs to be that kind of that back room, intellectual support, the arguments to be articulated and white papers and more thoughtful, not just get out and do the activism.
Yglesias: I mean activism is important and the certain topics, it really is like the thing that you need. But at this point, I do think that people on the left probably people on the right to have a real void at this knowledge and education. I mean if you are one of the 80 million people who are thinking about running for president in 2020, and you want to have some meetings with smart people who are like, what should I talk about? If you're a Democrat, you will get people to give you innovative ideas about environmental policy, about civil rights policy, about taxes. And I think you will really struggle to sit down meeting with someone who's credible, who's thought about this. And who can really say to you, this is what we need to be doing at the fed.
Yglesias: This is where we need to be doing to ensure that we have a strong labor market. I thought it was telling, it was recently center for American progress again where I now haven't worked in years, but they came out with this sort of big proposal for what would they characterize as jobs guarantee program. I wouldn't really call it that, but it was an effort to use public sector employment to really buffer labor market out bounds which shows they're interested in this general subject of like, what do we do to increase labor force participation? What do we do to make sure that we don't have these deep and severe downturns? I think you could make a case that something along the lines of what they're calling for is necessary or useful.
Yglesias: But the Federal Reserve and monetary policy are operating in the background of all of that. And it's completely missing from their report. But if you had a big effort to sort of boost employment through this kind of direct hiring, but the Fed wasn't sold on it, it would wind up purely crowding out. Potentially if you had a Fed that was more vehement about pursuing full funding and policies, this kind of public sector stuff would seem a lot less necessary. It's the elephant in the room in these policy debates but it's often like no one could see it.
Beckworth: Yeah it's a tough topic. And again, one of the reasons I would do this podcast is to hopefully broaden the discussions. So I'm wondering, like at Vox, when guys sit around and think about this issue, it's coming from a practical perspective, how do we make monetary policy interesting. Did those conversations come up? I mean, do you wrestle with that yourself?
Yglesias: Yeah, we do and it's very challenging, especially as we've moved into a more normalized kind of bays and I don't think there's a huge mass interest in exactly what will happen in this June meeting. The other thing is that the arguments have gotten a little bit tired at this point. I mean, the sort of economics blogosphere in its heyday has a really great, really informative back and forth. It's about NGDP targeting and 2% or 4% and all that kind of stuff. Which is great. I love those days. But at a certain point it's like you've gone 80 million rounds with people who believe in monetary impotence and there's like nothing more you can really say about it. I do think at a certain point, Jenny Yellen is going to have to be replaced.
Yglesias: Trump has a bunch of vacancies to fill. Anything that Donald Trump touches suddenly becomes interesting, so people will pay some attention to that. I've been thinking myself about trying to write something, a good headline can change the game on this. And that's part of it is I just need to think like what's the headline for 2017 for an article on what we kind of need from a Fed that's in a recovery mode. But how can we make that recovery being as good as it should be.
Beckworth: Yeah. What would be these some counterfactual exercises with you? Let's have some fun. Let's say Hillary Clinton had won. I think we probably both would agree that if she'd won the Federal Reserve kind of would have stayed as it is kind of status quo. No big changes. But what if Bernie had won? Bernie Sanders had won. That's a far scenario play along with me here. What would the Federal Reserve look like under a Bernie Sanders administration?
Federal Reserve Scenarios Following the 2016 Election
Yglesias: I mean it's an interesting subject. I think the main focus Fed wise of sort of people in the Bernie orbit is on the bank regulatory side and he is very interested in that subject. It is possible that we would have found ourselves entirely consumed with some kind of controversies efforts to break up the banks. I also think it's possible that with Bernie we would have gotten the kind of sort of regime change that Christina Wilmer has talked about that a left wing populist getting elected on a kind of big spending program plus making some appointments to back that up would have created some inflationary expectations in a way that I think it could've been helpful to the United States given its actual circumstances.
Yglesias: If you look at when Francois Mitterand took over in France in the early 1980s, you had a financial market reaction that was very counterproductive to the problems that the French economy was actually facing. But if you'd had that same kind of panic in the United States and the winter of 2016, 2017 slumping dollar capital outflows, I think people might've actually liked that outcome. It would have boosted manufacturing employment, been going for the West belt, that kind of thing. I will say though that that Bernie too, I mean, Democrats disagree about a lot of things internally. One thing they all seem to agree on is sort of just neglecting monetary policy issues as significant. Which I think is unfortunate.
Beckworth: Interesting. So potentially Bernie Sanders could have been the William Jennings Bryan's of the modern age?
Yglesias: Paul Krugman his old line is that we need someone who could credibly promise to be irresponsible. And I think Bernie was viewed as potentially irresponsible enough to pull that off. You saw some of that with Trump. It looks like it's faded, but when Trump first came in, it was this kind of Trump reflation where again, I don't want to say that in general, it's a good thing to have a president who people think doesn't know what he's doing. But you saw an inkling there, there was this Trump reflation moment that was actually what we needed at the time. And it's a little bit unfortunate to see that it's faded away, although that at the same time, the Fed shows the system that we have working as intended. The Fed is meant to be independent from the white house. It appears to still be quite independent from the white house and they are doing what they want to do, which is this kind of very slow but steady recovery.
Beckworth: The challenge from my perspective is you want someone in there who can do some regime change, but in an orderly rules-based, predictable manner. So that's why as you know the arguments for a little targeting that many of us have made would have done that. So very interesting though to think that Bernie could have come in and done that. Let me move to another area that tends to come up from folks who are either on the left or part of the group that doesn't think monetary policy has much effectiveness. And that is the downside to the Fed's policies of quantitative reason in particular. Many of them will make the claim that the Fed has increased inequality, particularly wealth inequality. And I think there're some studies that lend support to that. What is your take on that argument?
The Fed and Income Inequality
Yglesias: I do think this is a question where you have to say how important is that really? I mean if you could use quantitative easing to drastically reduce the unemployment rate even if wealth inequality went up, because the transition from joblessness to having the job does not actually alter the sort of overall distribution of financial assets that much, you're actually doing an enormous service to people. I mean, it's important not to let the numbers and the flow of funds report sort of obscure the obvious, which is that the transition from joblessness to having a job is like a huge game changer in people's lives. And the increase in the value of a stock portfolio of someone who's already wealthy is not that big of a deal. You can address that kind of inequality through the tax system or not frankly.
Yglesias: If everyone's living standards are rising, I'm not sure how much of a sort of ideological fanatic you have to be to worry too much about inequality under that circumstance. The other thing is that we could do quantitative phasing in different ways. I agree that the Fed hit upon this strategy. It's an instrument and they say okay, interest rates are down to zero, but we want to do something. So the thing that they came up with doing was quantitative easing and one of the goals in coming up with an instrument should be to come up with something that the public and the political system feels as legitimate and it seems like quantitative easing really failed at that. It's not rules-based. Nobody can understand exactly what's happening. Even the quantitative nature of it where you announce an amount of purchases rather than announcing a policy goal that you're trying to achieve.
Yglesias: It's always struck me as confusing. I don't know why they do it that way. And doing it through this kind of asset purchases, it seems like it frightens people. And it would be worth coming up with something that people like more. The traditional use of the federal funds rate, I think you could reasonably ask yourself like well, what difference does that make? I mean who even cares? But it was routinized. It worked well enough. I think my view, and I think it's your view too, is that what's really happening here is that coordinating expectations and it sort of doesn't matter that much what the instrument is, but they should pick something that people either don't care about or feel like they understand what they sent him up with quantitative easing seemed to really, really frightened sort of average people. It made politicians didn't know what to think about it. I think maybe increased inequality, it doesn't seem like a great choice all things considered.
Beckworth: Yeah. I want to come back to that later. I think the use of QE, particularly QE two in light of the crisis was scary for many people and made things worse in terms of political capital being spent. But back to your points about the inequality. I agree with you on them and I think maybe another way to frame it is do the counterfactual know QE. I mean, everyone would have been worse off arguably. I'd come around to the view that I don't think QE packs a lot of punch, but I do think it provided a floor on the economy.
Yglesias: I mean, if the unemployment rate had been way higher, would we be sitting around saying well, stock market's also bad.
Beckworth: And that's the thing. And I think people fail to do the right counterfactual. They criticize QE, but they say they don't think about what the alternative would have been.
Yglesias: The big problem with QE is that as far as I can tell, it was not that effective. I think people will dispute this. Ben Bernanki seems to defend it, but there was a large amount of dollars involved, at least it sounded like a really big number. And the impact was not obvious that anyone's lives were improving. And that's always a problem for policymakers. You need to show people the goods.
Beckworth: Yeah, absolutely. I think QE did not live up to the hopes and expectations of Fed officials of many of us. I championed it. I thought it would do more than it did. But again, I think the counterfactual is if the Fed then nothing thinks might've been turned out worse. Well, let's move on to some of your critiques. You've written quite a bit about the Fed. You had a 2014 Fox article, Obama's biggest economic policy mistake. So tell us about the arguments you make in that article.
Critiques of the Obama Era Fed
Yglesias: I think you can sum this up pretty quickly, but there was this apparently famous meeting where Obama was talking with his economic policy team and Christina Romer, who was the author of a number of great papers on the potency of monetary policy in these situations is there with him. And Obama apparently says to her that the Fed has shot it's wide and there's nothing that can be done on that front. She I think said that in her view, that's not correct. But it seems like she was sidelined from future decision making inside the administration, which was very focused on fiscal policy solutions and then ultimately on structural reform type things. And so Obama did not fill open seats on the EPOMC. When he came time to appoint a new chairman, it looked like the decision was being made exclusively on bank regulation concerns.
Yglesias: Some of the people who Obama of eventually put up there, strike me as excessively focused on financial bubble type concerns. Some of them are good people. I think Lil Brainer has done a lot of good speeches. But it's clear that Obama was aware broadly speaking, of being an analogous to the situation that face Franklin Roosevelt in the 30s, but he did not attempt to really understand and replicate what Roosevelt did with taking the United States off the gold standard. And we've laid in the economy. He instead operated with this stimulus mindset. He got it done. Once that was done, there wasn't more he actually couldn't do through the legislative channel. So he did nothing. And I think in a weird way Obama has come in for... he's been criticized for too many things. People on the right nonetheless will want to say like, he made dozens and dozens and dozens of critical errors and he did this wrong and that wrong.
Yglesias: And I really think that's not right. But then there's this Obama kind of hate geography where people want to say that his fans on the center left, he was amazing, blah, blah blah. I really think he only made a couple mistakes. But if you look at the slow pace of recovery in his administration, the mistakes he made must've been really, really bad. And I think that's what happened. I mean, he made the right call on the majority of policy friends, but he got monetary policy wrong and millions of people suffered for it. And his party suffered for it too. I mean, if you want to know why Democrats did so poorly in the 2010 midterms in particular, it's because the recovery policy was so slow and so ineffective and it's not single handedly on his shoulders, but he had an opportunity to push us forward, a much better outcome. And he didn't.
Beckworth: The response you got to that article, you got some blow back from the readers and you actually had a second article that came out after that, if I remember correctly. And the readers are like, no. It was the Republicans obstructionism by the GOP. And you had argued back the fact that he appointed Peter Diamond, that's the person that had ever shown us an example is that he doesn't get monetary policy what it can do. But I think the response also speaks to the point you've made earlier that monetary policy is hard and a lot of people don't get it. And the fact that they've pushed back the way they did, your article speaks to that.
Yglesias: Yeah, exactly. I think there was a desire to... Peter Diamond, great economist, somebody who liberal type people really like and respect where his work on pensions and other aspects of social insurance. But again, you need the right tool for the right job. And you have never seen in successful or failed Obama appointments to the fed, a real effort to drive a more rapid recovery in the bad years or to cement a new full employment consensus as things got better. Instead, it's a mixed bag. People were getting up there but it seemed like Obama's main concern was always with the Fed is a bank regulator, which I think is an important thing that the Fed does. But of the two things that it does, it's clearly the less important one.
Beckworth: So one of your critique is then Obama's, I guess the core critique in that article then is Obama did not have a great monetary theory or a good theory of monetary policy and that was manifested in his inattention to filling the seats. And some other articles, I think it was in your Fed up article and democracy, you've also were concerned about who he appointed. I know you weren't thrilled about him reappointing Ben Bernanke back the second time. But even Janet Yellen, when you mentioned somewhere I read your improving for the show, you think Janet Yellen hit did not live up to her billing as being this dove. So I guess here's my question. I wonder to what extent is it that the bureaucracy, the Federal Reserve itself, that when people go into it, they can't be who they want to be? I mean Ben Bernanke, the academic version of Ben Bernanke what he is able to do at the Fed seem to be two very different things. So I wonder, even if Obama could have understood monetary economics like you do, would he have still facing challenges from the Federal Reserve as an institution?
Yglesias: I do think it's true. There is clearly institutional reluctance at the Fed to take certain kinds of actions. That's it. These are the kind of problems that political leaders deal with. I don't fully know exactly what the move would have been, whether it would have been not reappointing Bernanke and putting someone else in, putting someone other than Yellen filling seats earlier, listening to Christina world more, but there was no sign to me. I'm someone who I live by, I'm working in DC. I spoke to a lot of Obama administration officials many times over the course of the years deleting congressional Democrats. And there is a difference between things that you try to do and fail to achieve, and things that you didn't really try to do. And moving the Fed toward a more pro-growth, faster recovery, full employment economy is not something that they tried to do.
Yglesias: It would be hard to do it, but I think you could have made real meaningful progress. They just didn't try. The president does not think that it's important. His key economic policy people who he liked and he listened to very smart people, but their focus is elsewhere. You have a limited amount of political capital as a president, there's only so many fights are going to take on. This is somebody he chose to say look, then Bernanke is well-qualified. He's doing good enough. Janet Yellen, she's solid candidate, she's doing good enough and didn't make a big deal about it. And he got reelected, he left office with a high approval rating. To some extent, there's only so much second guessing you can do. But I think you look at any kind of chart of the state of the labor market under Obama. And that was not a great recovery. He inherited a very bad situation that he had not caused, but we did not get the kind of snap back that even his team initially thought we would get.
Beckworth: Absolutely. I wonder sometimes if this is also a generational thing Janet Yellen, I wanted her FOMC press meeting scientist's conversation with Paul Krugman recently on the podcast, but she mentioned after one of the FOMC meetings, a reporter asked her about the possibility of overshooting. So you're still going to have 2% inflation target, but maybe overshoot to actually create a symmetric target. And she said, there's no way we're going to do that. We're not going to risk or jeopardize return to the 1970s. So there is this fear that, inflation will suddenly take off front away. And I wonder if it kind of pervades an older generation of economists and maybe it's just going to take time for those who live through this crisis will be less worried about the 1970s inflation than people the age of Janet Yellen.
Yglesias: I mean, there's this extremely elegant theory, right about time consistency and monetary policy, which says that a democracy should have a systematic bias toward too much a inflation and to people who lived through the seventies. I think that theoretical literature feels very real. And I agree that it's actually a very compelling theoretical literature. It just looking around the world, I mean, at the United States, but also Japan, European union, even countries like Israel and UK who've been a little more flexible. It just doesn't seem to be true that democratic political systems naturally generate too much inflation and that monetary policy makers need to be living to this state of paranoia all the time. I do think at some point, we'll get people born in the late seventies, early eighties, people who lived through the great recession. But it's remarkable to me how little impact the actual lived experience of the years.
Yglesias: 2008 through 2015 have made on people. I mean, that was, that was really bad. It was a really bad time for America and for the world. And you see with Donald Trump in office, you see Brexit significant destabilization of the political system, occurred as a result. And still you don't have people thinking, maybe there's a worse outcome in the world then a couple of years of three or 4% inflation. And honestly I don't understand it. I mean, I would not be thrilled if the price of stuff went up a little bit faster. Now I'm like anyone else? I like cheap stuff. But long-term unemployment, like it's terrible. People's lives are ruined. The British economy I think it's going to take a permanent wound from populism who knows what's going to happen in the United States. You have these technocratic institutions and they're entrusted with a very serious responsibility. And the… it did better than it could have, but not as well as it should.
Beckworth: That's a nice segue into another critique. You've had a Fed policy, and I'm drawing this from your 2011 article Fed Up, Democracy Journal. I want to read an extra per quote I got of yours. It's really fascinating. It says here, “Most important for all the flaws on the right, the political right’s current critique of the Fed, they're correct to point to the need for accountability. The idea of a central bank that's independent of day to day politics is a good one. But too often that comes to me and a central bank that's immune from criticism or meaningful supervision. The Federal Reserve systems, current vague mandate needs to be replaced with a specific target to find in law, the public and politicians we like it need to be prepared to hold the system accountable for achieving a target…
Beckworth: …and Congress needs to accept responsibility for picking a target.” So two things you bring out, they're very fascinating. The dual mandate bag and second, so Congress needs to shore up some responsibility and in sharpen that focus, a second point you make there is independence can run amok. You can actually abuse that privilege as well. So can you speak to those?
The Fed’s Current Mandate and Central Bank Independence
Yglesias: Yeah, I mean the mandate is stable crisis and maximum unemployment and low interest rates and whatever. It's all very qualitative. So then the Fed sort of makes up for itself. They eventually said, Oh, we're targeting 2% PCE growth. But that's their own sort of self-generated mandate.
Beckworth: Which they're not hitting.
Yglesias: Which they're not hitting. And it's a breakdown of independence to me is to say, look, we don't want, like Congress is weird. It's slow, it's confusing. The staff, is very young and underpaid. We don't want like the banking committee making interest rate decisions on a monthly basis. At the same time, they are the Congress, they decide what the government should do. To me, a reasonable thing would be for Congress to say, here's what we want. Whether it's a symmetric 2% target, it's an NG VP level target.
Yglesias: I mean, they would have to talk to experts. But comp was something, so we would have a target in law then the central bank would be independent in its conduct of monetary policy. But we could look back at the Humphrey Hawkins testimony and say, ah, okay, so are you guys hitting the target? And if you keep missing the target, then we would say, you guys are screwing up and something could happen. Or if they are the target. But the public is very upset with macro economic outcomes. The Fed officials could say, look man, it's not our fault. You told us to hit this target. We are hitting the target. If people don't like the outcomes, we either need to change the target or our problem has nothing to do with monetary policy. Instead, you would always have, would you think it would Bernanke was there these kind of very frustrating back and forth where it seemed like both the members of Congress and the Fed officials themselves were primarily focused on dodging blame.
Yglesias: Everybody agreed that the macroeconomic outcome was bad, but nobody wanted to say, why it was bad? Exactly. So members of Congress wanted to suggest that the Fed was doing something wrong, but they didn't want to order it to do anything. Bernanke wanted to say, well, no, actually we're doing fine, but your fiscal policy isn't that great. And that's pointless to me. I mean, that's not a good way to sort of structure the government. And I think it's set up during the crisis years in particular, bad incentives for the Fed where, they never wanted to except sort of ultimate responsibility for macroeconomic outcomes because the outcomes might be bad. But so consequently they always kind of talk themselves down.
Yglesias: I mean, if you have the officials out there all the time saying, well, the problem is fiscal policy, the problem is fiscal policy, that becomes very sort of self-fulfilling, right. In a successful kind of reflation. You need the person in charge to say like, no, this is going to work. And instead you had Bernanke constantly out there being like, well, I'm doing my best, but it's not going to work. And that's not Roosevelt and resolve to, to coin a phrase.
Beckworth: Yeah. So it's easy to be vague and not precise because then you don't get the blame. Another great quote, from that paper, I really like it. It says, "Much of the blame lies for the Fed's current statutory mandate. Simply put, it's maddeningly vague" Nobody can say the FOMC is doing a bad job because nobody can definitely say what his job is. And even with, even with that 2% target, it's still, it gives them lots of wiggle room. We'll hit it in a few months. We'll do this, we'll do that. But there's a lot of imprecision surrounding EPO and see the Bates press releases. One thing that's a big pet peeve of mine, I mentioned some, the show before, is that the Fed chair will get up and talk about, “Oh, we're getting close to our neutral rates.”
Beckworth: “We think we're getting close. You need to raise rates.” But they'll never declare what the neutral rate is. The short run neutral VIX will tell us what your benchmark is because I'm awfully confused. Are we there or not? I mean, you say we are. And then you don't raise rates. So there's a lot of uncertainty law, a lot of lack of precision. And I know sometimes I'd be there can't be but at least have some kind of strategy. I talked to Andy Levin before, he's affiliated with the Fed Up. He's also an economist at Dartmouth. He used to be a top aid to Bernanke and Yellen at the fed. And he's outlined what I think is a good idea, is having some kind of strategy for the year. Now they already have annual report but is not really much of a strategy, but maybe quarterly say this is what our goal is and how we were getting closer to it. But there's just a lack of, I don't know uncertain. There's a lack of meaning and direction and what they are going to do.
Yglesias: Right. And there seems to be a there's a sense, but they never spell out exactly what it is that there is some kind of asymmetries in there. I mean, it seems like everybody agrees that if the interest rates were just higher than they are right now and you were below 2% and had been for a long time and interest rates had been high for a long time, then nobody would be saying, well we need higher interest rates. But for some reason the fact that everything is lower is like relevant because it's important to be normal. But if that's true, right? I mean if an important policy goal is to have interest rates be normal which sounds wrong to me, but I mean if you're going to make it possible, you should spell that out, what is normal. What's the end state outcome that they are, think they are driving to with all the parameters that are in instead, they will give a couple explicit numerical targets, but there's clearly other things that they regard as relevant that they're not quantifying and they're not committing themselves to.
Yglesias: And so then you're not able to look back and sort of after action report and be like, okay, did 2015 like did that go the way we wanted it to? Like heading into the year, what did we think we were going to achieve and then did we achieve it? And if we keep failing to achieve our goals do we need to change our strategy instead? It's really very political. I mean for an institution that prides itself on not being political, a lot of this stuff seems driven by a desire to maintain a political standing rather than to sort of be institutionally effective.
Beckworth: Yeah, those are great points. Well, let's move to some of your proposals you played out in that article, the Fed Up article. You both talk about fixing the process, addressing changes at the regional banks, but also, I mean you've already touched on this, having it at the define target for the Fed. So let's talk about the regional bank challenges that you see.
Regional Bank Challenges
Yglesias: Yeah, I mean the regional bank thing, I mean on the one hand it's hard to know if this has been making a difference, but it's I think it's a crazy process, to have these regional banks rotating on and off. You have financial institutions governing boards. I think rightly drives public suspicion of corruption. I think we had a few years to when the regional bank presidents were outlining is a very, very, very hawkish and quite misguided sort of views. I think the whole pretense that the Fed is somehow like not a government agency is a little bit counterproductive. On the other hand, I mean, if they were implementing great policies, who really cares if the Kansas City Fed doesn't make sense. But it seems like a kind of quirky anachronism that, really we could, we've been doing with that. You should be, appointed congressional new firm people. They are entrusted with a very solid public responsibility and there's no reason that, member bank should have a Roland.
Beckworth: Okay. And then as you mentioned earlier, your other proposal would be to have Congress explicitly defined a target. The Fed would didn't run with it and then if it didn't work, if they actually had this, as you call it after action report, which is a great idea where they assess themselves and they can, they can basically throw the blame back of Congress, Hey you gave us this awful rule, do something better. And then there'd be debate in Congress. And so you would I think two things. One, it would bring better discussion but it would also make explicit that the Fed truly is a political institution as much as it wants to claim otherwise.
Yglesias: Right. And then, there some kind of tradeoffs that they need to be decided. I mean I think obviously if we had a level targeting strategy, which I think, and I know you think we should have, I mean I think on the whole that would be a much better outcome. But some people I guess would lose out. I mean, they would, there would be more inflation at times and you would need, I mean, the beneficial would need to be able to say, look, we are doing what you told us to do. Right, all things considered. There're good reasons to aim for level, but anything in life, it's got its ups and downs. And you do need a counter. This is a democracy. You need elected officials to ultimately be taking some responsibility for what's happening in the world.
Beckworth: Let's segue into nominal GDP level targeting since we've been touching on it. And this is the idea that the Federal Reserve with aim to stabilize the growth path of spending in the economy, nominal dollar terms, spending, total spending in the US economy. And you've written a lot about it and thought about it. So here's the question I have. Let's say we get Congress to agree to it. The Fed signs on, will the public buy into it?
Prospects of a Nominal GDP Targeting Regime
Yglesias: I tend to think that they would. I mean I think that, it would be in some ways more intuitive to people to say, okay, the cost of living is running too high, so if the nominal split wood was becoming unfavorable and then this is a structural problem that requires, reforms to the economy, we need to do something to make food or energy or labor cheaper, something like that rather than the current dynamic where monetary policy, because inflation targeting, we've been doing it for long enough that I think Fed officials think it's accepted, but anytime there's an adverse supply shock, particularly hitting food or energy, people go and they blame the bed because they've been trained to blame the bed for inflation. And then Fed officials I think quite rightly say, well look, I mean, there was a hurricane, like what are we supposed to do?
Yglesias: It's not our fault. There was a war in the middle East or Chinese people decided they wanted to eat more meat. And it's to me it's odd that the Fed has convinced itself that the current inflation targeting regime is so well accepted because you see that every time something goes wrong with it, people start yelling at the central bank and it's often for reasons that are completely out of their hands. Whereas trying to reach a nominal GDP level target, I think they could actually do and then they could, with some justification, blame other people for other problems.
Beckworth: I agree. I think, one way to sell it would be to say, look, maybe we don't call it nominal GDP level targeting because that's a mouthful. But another way of framing it would be nominal income or dollar income target and we're trying to stabilize the growth path of your dollar income. And I think people can see that in real terms.
Yglesias: The other thing I have to say is that I think you have to have been an economist for a long time to get yourself believing that the nominal figures are more esoteric than the real ones. That if you look at like actual reality, everything is nominal. Like my salary is nominal, nominal. My cable bill is nominal. And I think it's a very funny word. And of course the man on the street is like nominal. The heck does that mean? But people are very comfortable with nominal numbers and actually nobody knows how to do inflation adjustments of their head. So I, I feel like it would go a lot. You would need a different name. Some marketing people are very accustomed. I mean, people have 30 year mortgages.
Beckworth: Absolutely. It's real world. I mean, you think about people taking out 30 year mortgages, they're implicitly making a forecast about their dollar income growth over the next 30 years. Can they handle the mortgage payment?
Yglesias: And certainly nobody is sitting there in the bank and being like, what the hell? This isn't adjusted for inflation. I mean, I don't know. People move on with their lives.
Beckworth: So here's a question I have for the progessives who love nominal GDP targeting. I love it. I love the before 2008 and that is, would they be as excited about it on the downside. And then this is what I mean by that. During a recession, I think everyone get on board because it would lead to it some reflation restoring the level of growth of, of nominal demand or income. But if there's a real strong productivity boom, it would lead to the opposite situation. Now there would be high real growth, which would be great. So maybe this wouldn't be an issue, but what you would see is some disinflation maybe if in an extreme case, some wild deflation. But if there's rapid economic growth when people begin to bail and nominal GDP targeting because of this.
Yglesias: I mean, I think a boom is always hard to keep your wits about you and in like a real boom market, nobody has to be the kind of sour request at the same time, disinflation is like a funny word. But in the real world, if people saw the price of goods falling, I mean, would they be that upset about that? I'm a little bit skeptical. It seems it should work well enough. I mean if there's, a boom an honestly, I mean, the other thing is that I'm 36 years old. I'm not that young anymore and we've still like never in my lifetime had an extended period of like clearly to lose monetary policy maybe a couple of years here and there when we could have been a little bit more locked down.
Yglesias: But, not in any kind of extreme way that we've had recessions and, most of all, to me, the best thing about nominal target is that you respond more sensibly to supply side disruptions. I think it is very odd to say to people Oh, gasoline got expensive, so we need is for factory workers to lose their jobs. The connection between how the inflation target is supposed to work is actually so strange. As compared to saying, look, there's going to be some… from the monetary side and it's the job of the political branches to try to build an efficient high productivity on.
Monetary Policy on the Right
Beckworth: You're preaching to the choir here. I totally find it that, well, let's move to the time we have left to the right, the Republicans, the GOP. And this is something you've written about and you're Fed Up article and other places as well. But I want to recount a story you had in there. You mentioned that beginning of your story that you were at the 2008 convention and it's getting kind of boring. So you left, it went down the street to Minneapolis where there was a kind of a dissident, conservative libertarian going on with Ron Paul and you went in there a little more animated than the RNC meeting. And you mentioned that a speaker in there so that both Barack Obama and John McCain both have a lot to learn from the Austrian business cycle theory.
Beckworth: You mentioned the crowd went crazy with chairs and chancellor and the Fed and the Fed echo throughout the arena. And it was kind of an interesting moment. But what happens after that is, is that spirit begins to pervade the GOP to some extent. And the big point here is we have the GOP going from a Milton Friedman brand of monetary thinking to a more of an Austrian Rand Paul brand of thinking, what do you think that happened?
Yglesias: I mean some of it is just the timing and Obama and Bernanke. But I do think a lot of it is the changing sort of macro political context. I mean, Nolan Friedman, in his heyday, we had the cold war, we had communism, we had real socialist central planning. And so, what it meant to be a free market advocate. Friedman was actually something fairly relaxed compared to the modern day. So, he was there to say, look people got the impression during the great depression that capitalism fundamentally does not work. That it's like an unbuyable system and we need radical social change. And I'm here to tell you that that is wrong. That what we had, there was a technical problem that needs a technical fix, but that there's sort of basic pillars of the market economy are fine.
Yglesias: So that was a free market message of Milton Friedman's time. But I think there's a desire on the right the standards have changed, the Overton window has changed and you want a theory of the economy that will justify the idea that there can be any kind of redistribution, there can be any kind of welfare state. And for that you need to imagine that the economy is just like a self-driving engine. I mean, that's what Austrian business cycle theory gets you. That's what a gold standard, I think gets. He was the idea that there's no government intervention anywhere is needed. Where it's on the Friedman view, it's like, well, you need government intervention to stop giant recessions. So maybe you also need government intervention to like stop poor children from starving.
Yglesias: It's like, it all becomes a pragmatic question and there was a move, particularly during, during Obama's years toward a sort of a more hardcore, less pragmatic form of conservative politics. I do think part of what you saw with Trump's election though is that sort of base voters on it, right. And themselves rejecting that idea. I mean I have a lot of problems with Donald Trump, but he at least put himself forward as a sort of a practical businessman, a problem solver rather than like a guy who is invested in like dusty old books about, whatever. So I think, we are seeing that there's a lot of flexibility on this subject.
Beckworth: Yeah, I agree. I think the vote for Trump was an implicit vote against what we've tried the last eight years against. The kind of the hard money view as well as the Fed's own limitations. I've made it argue myself that, maybe they aren't consciously making that argument their mind, but I think the Trump voters are implicitly voting against that kind of status quo and we'll that as well as the tilt to the hard money view. I also think though, going back to why it got so vicious, Bernanke got railed in 2010 about QE2 before Congress. There was an open letter to Bernanke and many prominent economists signed off on it just got really, really critical. The Texas governor, Rick Perry said that Bernanke was committing treason. If you remember that great episode.
Beckworth: So here's my theory I want to hear what you think about it. I think is we had a very, very severe recession. We did have a very severe recession and people panic. They get nervous and they're always gonna look for a villain. And then, suddenly here comes, Democrat who's going to do massive government spending to fiscal stimulus. And then on top of it, you have a Fed doing something completely out of the ordinary QE. And QE1 was kind of in the heat of the battle. Maybe didn't give me as much criticism, but the time you get to QE2. QE2 was signaled well in advanced, they saw it coming and get plenty of time for the critics to line up their arguments against it. So when QE2 comes, that's when you really see this buckling down. This is going up against Bernanke. So I wonder to some extent if this is also just a consequence of the great recession and the responses that were done.
Yglesias: I mean, I think that's right. And I also do think that, there is the idea that we should have a rural based framework, which you do hear more from the right I do think is correct. I mean you need good rules, but there it was something doing QE2 think was better than not doing it, but there was something strange about this idea that this handful of policy mandarins were going to have a meeting and they were just going to decide like, should we do this weird new thing or maybe we want and how much will we do where there was no it wasn't like laid out in advance. If the economy deteriorates to this point, here's a solution. It's very unnerving to people.
Yglesias: I mean, I think the whole idea that the monetary system is subject to manipulation is a little freaky to most people. And the way it came about was not that well-handled. Something that's disturbing to me for the future is that we haven't actually developed a better framework. I mean read the courage to act. The takeaway you would get is that Bernanke’s advices successors is a hope, nothing too terrible happens. Then if it does have an emergency conference call and come up with some shit. We need to actually rethink this. What can we do that will be more effective and more acceptable and how can we lay it out in advance so that hopefully people have the confidence that we're not going to need to reach for these tools because they know we have them when they will be used, et cetera.
Beckworth: Yeah, definitely lessons learned needs to be further developed from the past crisis and QE2 was kind of let's try it, throw it against the wall, hope it sticks type of approach. QE3 got better for sure, but there's definitely some more soul searching it needs to be done on these issues. It was interesting when Romney ran for president that some people were saying, well if he does get elected, maybe he'll point Greg Mankiw to the Fed and the GOP will go back to its old Milton Friedman ways. And I wasn't so sure about that if at that outcome had happened. But what, you raise a good point though. We are seen, under Trump, this kind of implicit vote against that approach. So maybe there is more flexibility off at the night of imagined.
Yglesias: I would hope so. Gary Cohn, unfortunately at the national economic council that the handful of things I've seen him see over the years on monetary issues seem kind of confused to me. He had this remark that what we needed was globally coordinated increase in interest rates so that nobody would see their relative value of their currency go up, but we can get the higher rates that we need. Which was like backwards diagnosis and the problem, I find that a lot of practical financial market practitioners seem to have this intuition that low interest rates are bad and I don't really know why.
Beckworth: Yeah, very interesting. Well, our time is up. Our guest today has been Matt Yglesias. Matt, thank you so much for being on the show.
Yglesias: Thank you.