Friday, July 9, 2010

The Fed -- the Crux of the Problem

A quick look at the Econ projections of the last Fed minutes , and we can easily see why I think there's just a very clear case to be made that this Fed is negligent.

Their projections in 2010 for core inflation are betweeen .9 and 1.2% (which look high, but this isn't important), and 9.1-9.5% for unemployment. The problem is that the Fed, with these projections in hand, read this as a situation which calls for no action at all. I'm actually curious what the point is of having an inflation target of 2% if you project inflation of 1%, and do nothing at all to get inflation to 2%. Seems like a credibility problem to me...

It's also interesting to look back to the Fed's predictions from June of last year. Looks to me like the Fed did really well, predicting unemployment to be 9.5 to 9.8% at the end of this year, and core inflation at 1.0 to 1.5%. We're still a few months away, but it looks like we have a fair chance to wind up in that range or at least close. So, it looks like things are going just as the Fed planned, perhaps even better. Yet, the Fed didn't see forecasts of high unemployment and rock bottom-low inflation as calling for anything to be done.

The Fed is now predicting that unemployment might still be 8.5% at the end of 2011, and 7.5% at the end of 2012 but, again, doesn't see anything untoward about this. It's just the natural order of things.

Underlying this, of course, must be an underlying belief in market fundamentalism. They must believe we've been hit with a real shock, and that the market should be left to adjust according to its own tune, and that the Fed is only there to prevent total armageddon. Getting us back to full employment or near to it would constitute unwanted interference with the market place. Unfortunately, it also has real costs -- as people who are unemployed long-term lose skills, suffer depression, and are wasting years in which they could be doing productive things. During this time period, firms are also cutting back on Research and Development, meaning a slower rate of technological advance. Meanwhile, China is moving ahead with 10.6% growth expected this year...

Though it's tough for me to envision Obama getting beaten, 7.5% unemployment would likely make reelection more than just a walk in the park...

6 comments:

  1. Underlying this, of course, must be an underlying belief in market fundamentalism.

    That is a ridiculous statement. Many "market fundamentalists" are advocating more expansionary monetary policy.

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  2. China's drubbing of the US has less to do with government than globalization of market forces. Does the American worker still deserve a standard of living so much higher than most of the world?

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  3. "Does the American worker still deserve a standard of living so much higher than most of the world?"

    No, the Chinese worker definitely deserves to move up to the level that American workers enjoyed for so many years, and the American worker deserves to stay at (or return to) that level.

    BTW, does the American CEO still deserve a standard of living so much higher than most of the world's CEO's?

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  4. Anonymous writes: "Many "market fundamentalists" are advocating more expansionary monetary policy."

    Good for them. But my take is that rank-and-file economists see nothing untoward about Fed policy and that most conservative economists think the real scare is hyperinflation. Krugman did link a conservative worried about deflation, however...

    Kim -- Good comments. Nevertheless, the Chinese stimulus, as a percentage of GDP, was much bigger than the US's, the Chinese did more to keep up bank lending, and I'd seen announcements that they were using stimulus funds to build high speed trains/airports/health clinics in rural areas, all of which sounds like smart policy. And since they've been growing so fast, they've been taking away their stimulus measures in a smart way... On the other hand, monetary policy in Japan/US/Europe has been really inept...

    Globalization alone gets us nothing. The US and Europe have been trading w/ Africa for centuries -- and Africa is still poor.

    Alex -- good stuff.

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  5. Does the American worker deserve to be working in an economy that has run a per capita trade deficit so much higher than most of the world for over a decade?

    Does the American worker deserve to be working in an economy that sees such a high percentage of its income going to the top 1/2 of 1 percent of the population?

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