Monetary policy has important effects on both prices and employment. Thus it makes sense that the Fed’s Congressional mandate would include both of those variables. Now former VP Mike Pence has proposed replacing the Fed’s so-called “dual mandate” with a single mandate for price stability. Here’s Bloomberg:
Former Vice President Mike Pence is calling for an end to the Federal Reserve’s dual mandate, saying the central bank should focus solely on fighting inflation and leave creating jobs to Congress and the president.
I don’t believe that’s a good idea. When there is a negative supply shock such as the Ukraine War, it make sense to allow modestly higher prices for a period of time, rather than depress non-oil prices sharply enough to stabilize the overall price level. That’s why I favor targeting NGDP rather than inflation.
If Congress wishes to give the Fed a single mandate, it should not be inflation. Rather, it should be the thing that impacts both inflation and employment. That thing is sometimes called “aggregate demand.” But aggregate demand is too poorly defined as a concept to be included in a Congressional mandate. (Although I suppose you could say the same about inflation.) Instead, a single mandate might use a real world proxy for aggregate demand, such as national income. Here’s a possible Fed mandate:
The Federal Reserve shall insure a stable path for total national income at a growth rate that is consistent with a relatively low inflation rate over time.
If Congress insists on a specific figure for the average inflation rate, that’s fine. But I doubt whether Congress could agree on such a figure.
With my proposed mandate, the Fed would be effectively targeting NGDP. In that case, there would be no need for specific inflation and employment mandates, as NGDP is the thing that influences both inflation and employment.
READER COMMENTS
Ahmed Fares
May 17 2023 at 5:36pm
The MMT Job Guarantee (JG) does that. The JG anchors inflation and gets rid of unemployment by replacing an unemployed buffer stock with an employed buffer stock.
It kills two birds with one stone.
Also, by getting rid of the “reserve army of the unemployed”, it gives Marxists one less thing to whine about.
A link below about the JG from one of Bill Mitchell’s articles:
https://www.billmitchell.org/Job_Guarantee.php
john hare
May 17 2023 at 6:02pm
I got through about half of the article you linked. To say I disagree would be an understatement. Government make work for a social goal of zero unemployment is flawed on several levels. Several of the justifications in the article seem to have zero clue as to human nature or employment reality.
In my company, work effectively or relax. Pretending to work takes energy away from the things that really have to be done. It’s far cheaper and more effective for my people to relax for an hour waiting on material delivery or other hold up than for them to be doing useless things.
Scott Sumner
May 17 2023 at 8:45pm
Sorry, but MMT is nothing but snake oil. It is to economics what astrology is to astronomy. Utter nonsense.
vince
May 18 2023 at 6:47pm
From the Mitchell link: if the private labor market is tight, the non-Job Guarantee wage will rise relative to the Job Guarantee wage, and the Job Guarantee pool drains.
That’s quite an oversimplification.
What about the inflationary effect of payees in the Job Guarantee pool who aren’t producing anything that anyone wants?
Thomas Hutcheson
May 17 2023 at 6:07pm
Just make it a single mandate to control inflation so as to maximize long term real income. I suppose that’s what the Fed means by FAIT. The target has been optimized and there is loss minimizing flexibility in how quickly the forward looking average is re-established. If derived from the same model, Flexible Average NGDP Targeting would yield the same settings of Fed policy instruments. But politically it is probably easier to explain that we are trying to stabilize NGDP growth around the optimal rate than FAIT, (given the poor job they have done so far in explaining FIAT).
Don Geddis
May 18 2023 at 3:00pm
But controlling inflation does not maximize long term real income. That’s the entire problem.
Inflation was nicely low and “controlled” during the 1930’s Great Depression, and the 2008 Great Recession. But real output and real wealth plunged.
That is exactly why a single mandate on only inflation is so ill-advised.
Mark Brophy
May 19 2023 at 12:12pm
The 1930’s Depression wasn’t caused by low inflation but by excessive government spending. Herbert Hoover doubled spending during his term and FDR continued growing government even though contraction was obviously needed. Inflation is a tax increase used to fuel excessive government growth, strangling private enterprise. Pence is right, the Fed needs to focus on eliminating inflation because it’s so destructive.
vince
May 17 2023 at 7:40pm
The purpose of banks is to make loans. The central bank is the bankers’ bank. How about just a goal of ensuring that banks have enough money to lend what they want, in the framework of a legal system that makes those same bankers–not the public–absorb all losses for bad loans? That’s a market solution.
Scott Sumner
May 17 2023 at 8:50pm
That would be a disastrous policy, akin the the real bills doctrine. It leaves the price level completely indeterminate. How much money is “enough” for banks would depend entirely on the price level.
vince
May 17 2023 at 11:16pm
Disastrous? Prices would be based on what they should be based on–supply and demand. Bankers, who would directly suffer from bad loans, would use their best judgement when they lend. For example, they would have to be confident an expanding business could sell its expanded production to repay the debt.
Scott Sumner
May 18 2023 at 11:05am
You are confusing nominal and real variables. Supply and demand determines real prices. Nominal prices also reflect changes in the value of money. Someone must determine the price of money. If not the Fed, who does this?
robc
May 18 2023 at 2:46pm
In a free banking system, no one. Or everyone.
For tax purposes, the US Government could go back to defining the dollar. In 1792, they defined it as 371.25 grains of silver. That ship has sailed, but today silver trades about 20 grains to the dollar. The US could define a tax dollar as 20 grains of silver.
I would guess that most banks issueing currency would follow along and do the same. But some might define theirs in terms of gold or platinum or SPY* or whatever. To pay your taxes, you would have to convert, but otherwise you could use or accept whatever you choose.
*I call them SPYdie bucks.
Don Geddis
May 18 2023 at 3:08pm
@robc: You start by saying “no one” or “everyone”. But then of course immediately retreat to having the government define a metallic money standard. Just because you aren’t consciously running a thoughtful monetary policy … doesn’t mean that you aren’t actually running some monetary policy in effect. It is known that a metallic money standard causes the economy to perform worse than a well-thought-out fiat currency monetary policy. Your suggestion is dooming the economy to (relatively) poor performance.
Network effects and the inefficiency of barter basically force any economy to quickly adopt some monetary standard (especially for the unit of account, which is what matters for macroeconomic performance). If you refuse to be thoughtful about the choice, you’re going to wind up instead with a random outcome. Which is almost certainly worse than a carefully designed one.
vince
May 18 2023 at 4:49pm
When I said banks should lend what they want, I didn’t say to abolish the Fed. If a bank overextends, it needs a willing lender either from the interbank market or from the Fed as lender of last resort.
The Federal Reserve Act says the monetary policy objectives are to maintain long run growth of monetary and credit aggregates commensurate with the economy’s long run potential to increase production ….
If decentralized banks have to suffer for bad loans, aren’t they in a better position to determine that long run potential than a centralized Fed?
Scott Sumner
May 19 2023 at 1:15am
Vince, Don’t mix up money and credit. Banks should determine credit, but the Fed needs to have some sort of monetary policy. Money isn’t credit.
vince
May 19 2023 at 2:02pm
Couldn’t banks manage their own level of reserves, too, just as they manage credit? With a big risk of loss for overextending?
spencer
May 18 2023 at 10:59am
Targeting N-gDp stops inflation before it gets started.
Thomas Hutcheson
May 18 2023 at 7:25pm
The idea of NGDP targeting like FAIT is not to “stop” inflation but to optimize it.
spencer
May 19 2023 at 11:39am
I’m ok with that. The overruns and underruns are optimized.
Ahmed Fares
May 18 2023 at 9:57pm
vince,
Don’t let the perfect be the enemy of the good. A Job Guarantee, warts and all, would be disinflationary. This from Bill Mitchell’s article that I linked to:
As regards crime, a study from Vanderbilt University:
https://news.vanderbilt.edu/2021/02/05/new-research-examines-the-cost-of-crime-in-the-u-s-estimated-to-be-2-6-trillion-in-a-single-year/
vince
May 18 2023 at 10:19pm
Universal basis income, IMO, is a better solution than a jobs guarantee. That doesn’t give anyone the false impression that they actually have a real job. Aren’t there already too many bullshit jobs going around? Mostly related to government.
As I read it, Okun’s law relates the inverse relationship between unemployment and output. Production of something that no one wants equals production of nothing.
Mark Brophy
May 19 2023 at 12:17pm
Nobody deserves a job or an income except people who contribute to society by producing goods or providing services. Everyone else is a parasite that destroys society.
vince
May 18 2023 at 10:55pm
Ahmed: My original reply to you looks like it was censored. I guess I used a naughty word for bogus jobs. Anyway wouldn’t a universal basic income be better than a bogus job? Bogus jobs produce nothing and shouldn’t be counted as output.
Ahmed Fares
May 18 2023 at 11:56pm
vince,
A Job Guarantee is supposed to be superior to a UBI but if it was found to be unworkable, a UBI would be my second choice. This article argues why the JG is better than the UBI:
https://theconversation.com/why-a-universal-job-guarantee-beats-the-basic-income-pipe-dream-186793
Scott Sumner
May 19 2023 at 1:18am
Ahmed, The US already has plenty of jobs for anyone who wishes to work (and who has a pulse) and yet we still have lots of crime. Crime has little or nothing to do with a lack of jobs.
Ahmed Fares
May 19 2023 at 3:59pm
If you recall that frictional unemployment is roughly 3%, the disparity between black and white unemployment is much worse. Black people are the last hired and the first fired. Not only do they suffer more unemployment but their bouts of unemployment are longer. That plus the burden of caring for others in their family circle who may be struggling. All these factors and others lead to higher crime rates.
The reason you see such a difference in the studies done on the correlation between crime rates and unemployment is that they’re doing bad statistics.
Sure, if you come from a poor and broken family, you’re more likely to end up as a crack dealer. But if we plot the correlation of the number of crack dealer arrests as a proxy for the number of crack dealers versus the unemployment rate over time, we’re not going to see a correlation there. Nor should we expect to see one.
The effects of unemployment are long-lived and cumulative.
As for their unemployment rate:
There are other causal factors but I believe unemployment is the main one.
Anonymous
May 21 2023 at 12:40pm
In fact there is no evidence for unemployment being a factor at all. It should be no surprise that criminal tendencies go along with unemployment. People have studied this question in depth for a long time.
spencer
May 19 2023 at 10:46am
There is a positive correlation between crime and (1) income inequality and (2) standard of livings.
Real average wages have fallen y-o-y:
Real Earnings Summary – 2023 M04 Results (bls.gov)
According to Corwin D. Edwards, professor of economics, [Edwards attended Oxford University in England on a Rhodes scholarship and earned a doctorate in economics at Cornell University. He spent a year teaching at Cambridge University in England in 1932. He taught at New York University in 1954, the Chicago School from 1955-1963, the University of Virginia, and the University of Oregon from 1963-1971.] the U.S. Golden Age in Capitalism was driven by “increased money velocity which financed about two-thirds of a growing GNP, while the increase in the actual quantity of money has finance only one-third.” In other words, the ratio of the money supply to GNP had fallen.
The economic solution to combating higher crime rates is to drive the banks out of the savings business.
Philo
May 19 2023 at 11:58am
“[A] relatively low inflation rate ” is awfully vague. Why not zero?
Mark Brophy
May 19 2023 at 12:22pm
Deflation is better than zero inflation. I’d rather pay less for things like food, rent and gas for my truck.
Anonymous
May 21 2023 at 12:45pm
Would you like your wages to go down as well?
vince
May 21 2023 at 4:26pm
No, but deflation would be the natural state with a technological improvements.
vince
May 19 2023 at 1:48pm
Good question. The standard answers–FWIW–are that it might lead to a deflationary spiral, and that it constrains the Fed from lowering interest rates.
I question whether slight deflation would be so risky if *target* inflation was zero instead of 2 percent. With a fixed money supply, for example, slight deflation would be the natural state.
spencer
May 19 2023 at 3:10pm
Gross domestic product for the 1st quarter of 2023 in Japan is too high. The BOJ needs to tighten.
Gross Domestic Product for Japan (JPNNGDP) | FRED | St. Louis Fed (stlouisfed.org)
Ahmed Fares
May 19 2023 at 4:11pm
In line with my other comment, this from the National Institute for Justice makes the same argument that crime is a result of unemployment, but that it works indirectly through family disruption, which is why the statistics don’t pick it up.
vince
May 19 2023 at 6:52pm
Unemployment isn’t solved by fabricating a phony job. Fraudulent jobs don’t provide self esteem except to the delusional.
Anonymous
May 21 2023 at 12:49pm
Read this: https://devinhelton.com/inequality-crime
There are many examples of very high unemployment societies with low levels of crime.
Ahmed Fares
May 21 2023 at 4:36pm
First, thank you for what is a fascinating article.
The most important measure is neither income inequality or wealth inequality but rather consumption inequality. As the following quote shows, you can have rising income inequality while consumption inequality is falling (the article which is titled “When It Comes to Inequality, Consumption Is What Matters” is from 2014):
source: https://manhattan.institute/article/when-it-comes-to-inequality-consumption-is-what-matters
As an aside, Blair Fix recently wrote an article titled: “Masochistic Fun with Plutocratic Murder”.
https://economicsfromthetopdown.com/2023/05/20/masochistic-fun-with-plutocratic-murder/
Blair is trying to make the case that plutocracy is associated with higher homicide rates. Without even looking at the chart, I knew that countries like Saudi Arabia, Qatar, etc. would have low homicide rates despite the huge income inequality because even the relatively poor live well in those countries. The opposite is true for Latin America, Africa, etc.
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