Search This Blog

Friday, July 11, 2008

The Fed’s Role, Economists and Politicians

Politicians are particularly adept at peddling bad economic ideas. But where do they come up with these misguided notions?

Well, tragically, it’s usually from economists.

I was reminded of this unfortunate fact with the latest Wall Street Journal survey of 53 leading economists.

The question that grabbed headlines was: “In the current environment, should the Fed be more concerned about inflation or economic weakness?” The answer was striking – 22 of these economists said “economic weakness” and 21 said “inflation.” The other 10 said balanced or no comment.

That means not even half of these economists said that the Fed should be mainly concerned about inflation. Have the 32 of these 53 economists not citing inflation forgotten what the primary job of a nation’s monetary authority is? That is, maintaining price stability. Apparently, their memories have failed, or they never learned it in the first place. Either way, it’s kind of scary.

Montary policy is ill equipped to fine tune economic growth. Indeed, that’s a dangerous game for any art of government – including the Fed – to be playing.

And when the Fed loses focus on price stability – as has been the case recently – inflation and inflation expectations rise, and that creates uncertainty for entrepreneurs and investors, which in turn is bad for economic growth.

For good measure, the value of the dollar suffers, which winds up pushing up the dollar price of commodities, like oil.

Does any of this sound familiar?

Economists should grasp that monetary policy focused on price stability is essential for the well being of our economy. Meanwhile, fiscal policy – in particular, tax, trade and regulatory policies – is the proper means for policymakers to affect economic growth. Specifically, by keeping taxes low, trade open and the regulatory touch light, the economy will grow robustly.

Unfortunately, when so many economists stray from the economic basics, what can we expect from the politicians?

No comments: