Caroline Baum of Bloomberg News thinks so. Here she discusses how the new transparency might play out:
Some forecasts are more important than others, which is not to say they’re more accurate, just that they matter more. The Federal Reserve’s forecasts belong in this category.
Unlike the average Wall Street prognosticator, the Fed has the unique ability to make its forecast become reality through its manipulation of the federal funds rate (the overnight rate at which banks lend to one another) and control of the monetary base (ARDIMTBA). That’s why the central bank’s forecasts, and what’s required to achieve them, matter.
Starting with the Jan. 24-25 meeting, we will learn for the first time what funds rate is associated with the Fed’s projections for inflation, unemployment and real gross-domestic- product growth in the current year, the next few calendar years and “over the longer run,” according to minutes of the Dec. 13 meeting released this week.
I disagree. The Fed’s new transparency just adds to the cockeyed notion that it can carefully manipulate real economic outcomes to manage an economy to perpetual steady growth. It can’t. All the Fed can do is tinker with the money, and money is just a mechanism whereby the value of some real good or service is calibrated to some other real good or service. Money never buys anything. Goods and services buy things. When the Fed tries to impact economic outcomes by tinkering with the value of the money, it ultimately impairs the usefulness of money in transmitting and calibrating values across disparate markets, and confiscates, for a time, a small portion of the value the money is meant to represent.
For instance, when the Fed pursues an inflationary policy, it effectively hijacks a manufacturer’s output in transit, skimming a portion of its value away. Once the manufacturer has suffered at the hands of the Fed’s value-skimming trolls enough, he will learn to accommodate the loss, and the Fed’s actions will ultimately be ignored and ineffective. So what if the Fed tells the manufacturer in advance where its trolls will be, and what they will charge during transit? The manufacturer will figure it out quickly enough, no matter how transparent or not is the Fed.
But even if the Fed was capable of engineering steady long-term real economic growth in the 2.4-2.7% range, as is its stated goal, it’s hardly clear that such a thing would be desirable. Economic systems, like the humans comprising them, do not always grow, and when they do grow, not always at the same rate. Sometimes growth is explosive, and should be, due to some new technological advancement that enhances productive capacity (e.g., the personal computer) , or the ability to transmit information (e.g., the internet), or even the opening of new markets to old products and processes (e.g., China from the late seventies on, the Soviet bloc after 1990). Sometimes growth should be slow, non-existent, or even contractionary, as when speculation has severely misallocated resources (e.g., railroads in the late 1800’s, the internet in the late 1990’s). Capitalism depends for its vitality on periods of excessively robust expansions and periods of excessively despondent contractions. There must be occasional pain compelling its animal spirits to action in order that there may also be the always transitory pleasure of growth. Were the Fed capable of engineering slow, steady growth, it would be a sure recipe for creating zombie enterprises that feed on stagnation to fuel their corrupt appetites.
Monetarism–the idea that real economic outcomes can be engineered through tinkering with government-created money–is a species of Keynesianism mainly attributed to Milton Friedman and his acolytes. It first gained wholesale acceptance at the Fed with the ascension of Alan Greenspan to the chairmanship of its Board of Governors. Greenspan had the great good fortune to be Fed chairman when several productivity-enhancing technologies arrived on the scene (the PC, the internet, adjustable rate mortgages [okay, that last one’s a joke]), and the failure of the old Soviet Union and the economic development of China meant that huge new markets, with more efficient means of serving them, simultaneously appeared. The Fed alone couldn’t have prevented growth had it wished to, no matter how stupid or smart it may have been. But since it preached a monetarist philosophy, and since Greenspan was always willing to accept accolades as the genius maestro of the economy, people really started to believe that the Fed was some sort of economic wizard (or was headed by one), that could manipulate real economic outcomes by pulling at mysterious monetary levers. The perception could not be further from reality. Greenspan just got lucky, but his predilection to tinker with the money contributed to (but did not solely cause) imbalanced asset allocations that ultimately resulted in a crash and contraction. US economic growth has averaged about 2.7% or so a year in the 25 or so years since Greenspan became the Fed chairman (including the Bernanke years), but the growth rate in any given year rarely hewed close to the 2.7% range. Sometimes growth exceeded target, sometimes it was non-existent. If the Fed were trying to engineer perpetual and steady growth of 2.5-2.7% per year, it has suffered a series of short-term failures. Over the long-run, its target has been roughly achieved, but 2.5-2.7% is roughly the long-term sustainable (i.e., natural) rate of growth for any living organism, so who’s to say the Fed had anything to do with it? It has to be asked, had a computer algorithm instead been created to manage the money supply in order that money retain its usefulness as a medium of exchange and temporary store of value, would the outcome have been any different?
Baum, to her credit, acknowledges the reality:
Monetary policy can only affect nominal aggregates, Sumner explained in a recent online interview with EconTalk’s Russ Roberts. “Real outcomes” depend on things such as structural factors, government policy and productivity, he said.
I would add that real outcomes depend more on demographics than on productivity, government policy or structural factors. Europe and Japan’s economic problems are almost exclusively due to the demographics of their rich, but rapidly aging populations. The Bank of Japan has tried every monetarist and Keynesian type of stimulus imaginable. Its economy still languishes, going on two decades, and will continue to do so unless and until its females decide again that having babies is worth the trouble.
Indeed, perhaps we don’t need the Fed, but instead some IBM mainframe. Call him Fred. Program him to ensure there is enough money in circulation to meet the transactional needs of the economy, keeping an eye thereby on the relative value of the money, and then get back to the business of producing real value, instead of trying to conjure value out of thin air by dint of government presses.
And for all ye faithful believers in the Fed’s ability to favorably influence real economic outcomes that remain convinced of the Fed’s powers, I leave you with these three exhibits, all of which occurred on the Fed’s watch: The Great Depression; more or less the whole of the 1970’s, and the latest, Greatest, Recession. If these are indicative of the benefits of having a Fed engineer favorable economic outcomes through tinkering with the money supply, it’d be hard to imagine the horrors that not having a Fed would have entailed (snark).
Belief in the Fed’s power to affect real economic outcomes is tantamount to a medieval peasant believing in a priest’s explanation of mysterious natural phenomenon as the product of God’s desire to arbitrarily reward or punish those affected by the phenomenon. The sooner belief in the Fed’s power is abandoned, the sooner the real factors affecting economic activity might better be understood.