Friday, September 14, 2012

The Button Down Mind of Matt Yglesias

Matt has an amazing ability to compartmentalize. He doesn't seem to notice or care that this tweet, awesome though it is, completely conflicts with his beliefs about how monetary policy can work:

"Given that nobody in congress wants to do the sequester, why not just not do it? Don't let the stupid debt deal force our hand!"

Here Matt recognizes that future laws can just be repealed if, when the time comes, they are no longer in the best interest of Congress.

However, he absolutely refuses to acknowledge that this exact same idea holds equally well for the Fed and monetary policy.

Suppose it's February of 2014, and unemployment has fallen to 6.2% (through reductions in the numerator, not the denominator). Suppose core inflation is now running around 4.5%. Then consider the following Fed scenario.

"Given that none of us on the FOMC want to still keep the policy rate at zero, why not just not do it? Don't let the stupid previous forward guidance force our hand!"

Works just as well, if not better, because the Fed's process for "just not doing it" is much simpler than is Congress's process.

No policymaker who enjoys discretion can credibly commit to undertaking a future action that will likely not be in their best interest to undertake when the time comes!

Why do you think the Super-committee failed? Part of the reason was they didn't fully believe the doomsday cuts that accompanied failure would actually happen.

Monetary policy is no different. To the extent that policy effects depend on people believing the Fed will act against its own interest in the future, the policy just won't be very effective.

Now this new package of monetary policy actions may help. I'm in favor of trying more stuff like buying MBS. But if you think the Fed will not tighten when the economy recovers, there's an upcoming sequester I'd like to bet you about.


Dave Hansen said...

And at least with Congress & the Presidency, there are lots of veto points that can lock in current policy (Repubs have House, Dems have Senate & Pres, Repubs can filibuster in Senate). Where are all of the veto points in the Fed to make it hard to change the status quo?

And as a side note, I think Congress very much did the sequester on purpose to try to lock in actual spending cuts instead of just talk about them. The Super Committee was a red herring so that each side could show their base that they wouldn't compromise, yet they had all voted on a compromise. And now they get to act like they don't like the very policy they passed knowing full well that it would be the new status quo. Did anyone really think the Super Committee was set up to succeed?

Angus said...

Dave: good point re veto players and interesting take on Congress, the super committee & sequester. Clearly that's a possibility. I guess we'll see how it plays out.

Dave Hansen said...

Thanks. I'm seriously on pins and needles waiting to see if they really can tie a future Congress's hands.