May 24, 2018
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Choosing a path through the financial fog

By The Washington Post

On Aug. 9, top officials of the Federal Reserve, and their staff, assembled around a gigantic conference table to decide what, if anything, they should do to help the flagging U.S. economy. Just about every member of this group, headed by Chairman Ben S. Bernanke, was an expert in economics, banking, finance or law. Each had access to the same data. And yet, after hours of discussion, they could not agree.

As newly released minutes of the meeting confirm, the resulting Fed policy announcement — near-zero interest rates would probably continue through mid-2013 — was a carefully worded compromise between those who favored aggressive monetary stimulus and those who feared that would risk too much inflation. Even then, the statement only passed 7 to 3 among the 10 voting members present. The three dissenters each voiced slightly different concerns about how the Fed’s statement could prove counterproductive.

Our point is not to take sides in this debate but to draw a lesson from the fact that it occurred at all. To hear various politicians, columnists, bloggers and businesspeople tell it, the solution to the U.S. economic slump is perfectly obvious: The Fed should release even more monetary stimulus, some say — or, say others, the Fed should hold steady. Congress must dramatically increase spending on public works — or slash the budget. The Obama administration should rush more relief to homeowners — or let housing prices find a bottom. Everyone can point to facts and figures and claim the backing of an economist. More than a few of the kibitzers are economists.

But as the Fed’s in-house debate shows, no one has a magic bullet; every proposal for kick-starting economic growth involves trade-offs. Someone will benefit, and someone will pay. Sometimes, the costs and benefits, and the winners and losers, are relatively apparent. At other times, like now, the fog is thicker.

This is one reason they call economics the “dismal science.” Actually, it’s more dismal than science. It’s hard to picture a panel of physicists agreeing to split the difference about some disputed issue in quantum mechanics. In the natural sciences, you can conduct experiments and let the data decide. There’s no laboratory at the Fed. And even Nobel Prize-winning economists have far less certainty about the workings of the U.S. economy than an average physicist has about subatomic particles.

During the Fed’s Aug. 9 meeting, for example, participants professed not to know why the business cycle’s self-correcting mechanisms are so much weaker today than in past recessions. They acknowledged that the 2008-09 recession was deeper, in hindsight, than they realized when it was happening. But, of course, this implies that they made policy back then based on imperfect data. Who’s to say that isn’t happening now? According to the minutes, there was general agreement that “the degree of uncertainty surrounding the outlook for economic growth has risen appreciably.” Translation: The only thing the Fed knows for sure is that there is a lot more that it doesn’t know for sure.

Congress gave the Fed a dual mandate: Maximize employment and keep prices stable. Yet that ostensibly technical task involves value judgments. Economists are not necessarily any better at those than the general public is, and they wouldn’t be even if they had perfect information.

A political economic policymaking is a chimera. The Fed will always have its critics, internal as well as external, and that is as it should be in a democracy. It would be more honest, though, if purveyors of economic solutions — whether in Washington, on Wall Street or in the media — displayed a little more humility and a little less certitude.

The Washington Post (Sept. 1)


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