Krugman argues against changing the Fed's mandate to focus on price stability only, instead of price stability and employment.
No mention of effective demand or fiscal policy.
Read it at The New York Times | The Conscience of a Liberal
Unemployment and Inflation
by Paul Krugman
Favorite line: "Some people have pointed to the failure of inflation to fall by a lot as evidence that the NAIRU — the non-accelerating-inflation rate of unemployment — has risen sharply, so that America is now at more or less full employment."
In the face of that, I guess Krugman is not so bad. At least he is not willing to go there.
3 comments:
Congress should give itself a mandate to work with the executive branch to achieve full employment while maintaining stable prices and financial stability. The operational capacities of a central bank are too limited to perform this role
The Fed's mandate should consist only in something like this: "Supervise the payments system and regulate the banks, and otherwise stay out of Congress's way."
The Fed's job should just be to respond adequately to the endogenous demand for credit while maintaining the financial integrity and honesty of banks. The Fed shouldn't be in the business of setting macroeconomic policy and either stimulating or destimulating anything.
The responsibility for countercyclical responses to rising and falling employment, consumption and production belong with the political branches - the one's that can actually spend and tax in significant ways, and thus expand deficits and contract deficits as needed.
It would be useful for Congress to re-delegate to itself the option of authorizing the Treasury to run deficits that are not offset by additional borrowing or taxes. If it is macroeconomically useful for the federal government to increase the gap between spending and tax revenues in some fiscal cycle by, for example, $500 billion, then they should just do that. Operationally, this might just consist in a simple order to the Fed from Congress to credit Treasury's account by the desired amount.
Public borrowing might be useful as a tool for managing interest rates and providing secure interest income to holders of large US dollar balances as an inflation hedge, and to supplement commercial bank savings services. However, for the most part, public borrowing is a holdover from a pre-fiat era, when the public was a mere user of forms of conventional money that it sometimes had to borrow from other sources.
I agree with Dan K, as usual.
The only part of Dan Kervick’s proposal I don’t like is that it effectively gives politicians the right to print money. So I’d prefer to see the size of “deficits that are not offset by additional borrowing or taxes” determined by some committee of economists. Monetary policy is already out of the hands of politicians and in the hands of technocrats. Same should apply to the macro effects of fiscal policy.
In contrast, strictly political decisions, like the proportion of GDP allocated to public spending, and how that total is split between education, infrastructure, etc would remain in the hands of politicians and the electorate.
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