As central banks go, the Federal Reserve is one of the best. Much academic literature suggests that one of the reasons for its relative success is its relative political independence and freedom from partisanship. Central banks that are partisan or politicized are likely to engineer booms to elect the candidates of their party even if those booms have unfortunate long run effects on the nation. The classic case is a bank that pursues a loose money policy in the run up to the election to create a false sense of prosperity or to enable the party in power to finance…
The Federal Reserve Board seeks to maintain an inflation rate around two percent per year. While this rate might sound low for older types who remember double-digit inflation rates in the late 70s and early 80s, and a rate of 5.4 percent as recently as 1990, why tolerate, let alone seek to sustain, any inflation at all? Why not seek to establish zero inflation and stable prices? After all, even an inflation rate of only two percent a year means nominal prices still double every 36 years. And while people can and do broadly adjust their behavior in the face of anticipated inflation, it’s not a seamless process. Inflation distorts people’s economic decisions, whether as producers or consumers, labor or capital, and so imposes costs on us all.
There’s some historical elegance to the fact that the Fed’s annual symposium in Jackson Hole, Wyoming, is roughly as old as the modern Fed itself. The symposium, hosted by the Federal Reserve Bank of Kansas City, started in 1978.
To compare The Money Makers: How Roosevelt and Keynes Ended the Depression, Defeated Fascism, and Secured a Prosperous Peace to a 100,000-word inflationist op-ed by Paul Krugman would be unfair—unfair to Paul Krugman. It goes beyond Keynesian hagiography to Keynesian deification.
A recent article in the French newspaper Le Monde drew attention to an important difference between the French and the Germans. The French, said the author, think that the government spends other people’s money; the Germans think that the government spends their own money. This, if true, is important because each attitude must affect the politics as well as the economic policy of its respective country.
The key message of Stephen King’s book is that “we” have been living beyond our means. In his words: “We became delusional. We convinced ourselves that capital markets could deliver ever rising prosperity. We thought we could borrow without limit, always confident that the future would be better than the past.” And not for one moment, he adds, “did we think we would ever succumb to Japanese-style economic stagnation or Argentine-style broken promises.” King emphasizes that we are all in the same boat, and that we were all wrong. It is fair to say, however, that some raised a voice of…
A conference was held at the American Enterprise Institute on March 20, 2014 on the question: Is the Federal Reserve a philosopher king or servant of the treasury? Alex Pollock, a frequent contributor to Law & Liberty and participant in the AEI discussion, offers here in condensed form the arguments and the instructive history presented.