The Skeptical Optimist

The Fed vs the Politicians

Last Friday, the top story in the Wall Street Journal was all about how our esteemed politicians on Capitol Hill jumped all over Fed chairman Ben Bernanke the day before.

It was the harshest public grilling for a central bank chief since the late 1990s... The mounting controversy over the Fed's involvement risks subjecting the central bank to the kind of political pressure it has managed for decades to resist.

As usual, our esteemed politicians seem to disagree amongst themselves as to exactly what is so upsetting about the Fed's actions.

Critics on the right, especially House Republicans who have long been suspicious of the Fed's power, say the central bank intervened too aggressively into the private sector. Critics on the left say it has been too opaque in its actions and too easy on big banks.

Publicly, the politicians are split as to why the Fed irritates them. But I suspect a hidden agenda: politicians wish they had more control over the Fed -- but they don't, and that's why they were acting like spoiled kids last Thursday. Bernanke handled his grilling with admirable composure, and as I watched a recording of the session, I thanked my lucky stars that our country is, so far, still following Alexander Hamilton's advice to be sure that control of the central bank is kept AWAY from the politicians. If that condition changed and our esteemed politicians somehow gained a much larger measure of control over monetary policy, I'd have to triple or quadruple the odds of a deflationary depression or of high inflation — or both of those disasters taking turns in a perpetual cycle.

Obama should reappoint Chairman Bernanke in January, period. Bernanke knows how monetary policy should be handled in unusual times like these, he's doing it, he openly explains it to us in terms we can understand (unlike any past Fed chairmen), and he somehow maintains his composure when being grilled by grandstanding half-wit politicians. Those are valuable skills, especially the last one.

Inflation/Deflation watch
For now, the Fed continues its success at preventing both deflation and inflation. Here's the latest Inflation/Deflation chart.

[If the politicians ever gain direct control of monetary policy, I'll have to expand the Y-axis scale significantly upwards and downwards.]

Obama gets it: “Robust” growth is the solution

At last! We have a political leader who has found a way to say “Deficits don’t matter under the right conditions” without becoming the target of ridicule and partisan barbs as happened to Dick Cheney. I consider that a huge and important step in the right direction.

Obama said the following in a recent interview with Bloomberg (...and thanks to William B. for the tip):

One of the biggest variables in this whole thing is economic growth.

And, most importantly…

If we are growing at a robust rate, then we can pay for the government that we need without having to raise taxes.

I give that sentence an A-minus. That puts Obama way, way ahead of all other politicians, who deserve D-minuses and F’s in the category of understanding and communicating the overwhelming importance of “robust economic growth.”

Mind you, I’m not complaining, but if I could have tweaked that sentence just a little, it would have read as follows (my tweaks are in boldface):

If the private sector is growing at a robust rate, then we can pay for the government that we need without having to raise anybody’s tax rates.

Presumably, we can all agree that "growing" means "creating new jobs, products, and services"; I hope at least that is nearly unanimous. But tweaks aside, this is very encouraging; we’re making important headway, at least rhetorically. Now all we have to do is make “robust growth” happen in reality—which requires a lengthy and important debate, to which I will be happy to contribute.

For now, however, I’d like to enjoy the moment. “Robust growth” is at last out there for us to think about and talk about with our family, friends, and neighbors, thanks to President Obama's communications skills. He's a great talker, and that's an indispensable first step.

FYI

Posting will be lighter than normal for a while, due to an emergency. I'll keep the comments up to date.

Steve

Jobs "saved"? Great, but let's see the math.

Apparently, someone in the administration knows how to keep track of the number of jobs that would have been lost if the this administration's policies hadn't been in effect.

Gee, I think that's just great... but I'd like to see the math, please. Social scientists would call it "quantifying the counterfactual" -- an oxymoron. Regular people just call it "making up data for political posturing" -- a tactic that fools only morons.

Here's an excerpt from the Wall Street Journal's article, The Media Fall for Phony 'Jobs' Claims:

...the inability to measure Mr. Obama's jobs formula is part of its attraction. Never mind that no one -- not the Labor Department, not the Treasury, not the Bureau of Labor Statistics -- actually measures "jobs saved." As the New York Times delicately reports, Mr. Obama's jobs claims are "based on macroeconomic estimates, not an actual counting of jobs." Nice work if you can get away with it.

Let's see the macroeconomic estimates, and the math behind them. It would enable us to add some important additional data to the excellent chart below (one that I wish I'd though of) which I borrowed from the Innocent Bystanders blog. It shows three sets of unemployment numbers: the actual results, and the results the administration projected with and without their recovery plan.

Click to enlarge:

Obviously, the administration's plan isn't delivering the results their experts had projected four months ago. Yet we keep hearing about all the jobs "created and saved" by that same plan. Something isn't adding up. Maybe an unveiling of the math behind the estimates would clear things up(?).

Maybe, but I won't hold my breath.

Does Obama subscribe to The Economist?

I hope so. If he doesn't, there's not much chance his advisors will alert him to the latest edition's lead article:

"Piling on: In his zeal to fix capitalism, Barack Obama must not stifle America’s dynamism."

(A ray of hope: maybe Austan Goolsbee can slip him a copy when the others aren't looking.)

This is a must read. It summarizes my main fear that the "temporary" fiscal package for stimulating the private economy is permanent, not temporary, and will stimulate politicians and bureaucrats, not entrepreneurs and innovators. (Outsourcing the package to Nancy Pelosi certainly didn't help matters, as the article points out).

A few excerpts:

America has experienced a failure of finance, not of capitalism... Even in boom times, 15% of American jobs disappear each year. Their places are taken by new ones created by start-ups and expansions... Americans are adept at finding opportunity in adversity...

Yet Mr Obama—and, even more, his Democratic allies in Congress—could do lasting damage to this marvellous [economic] machine. [Outsourcing rule-writing is risky because] Congress is much more likely than the executive branch to let special interests or demagoguery shape the outcome...

America’s free-market capitalism has always been a model for the rest of the world. By all means fix its flaws, Mr Obama; but do not take its dynamism for granted.

Future entrepreneurs and innovators would grow the economy (i.e., create real jobs)  faster if given sufficient incentives, but I'm afraid Mr. Obama doesn't know much about them, let alone what motivates them. That's the reading I'm getting so far, anyway. A long conversation at the White House with someone who does understand the growth engine, such as recent Nobel winner Edmund Phelps, might help cover that blind spot, but that's just wishful thinking on my part.

Anyway, be sure to read the article in The Economist. Here's the link again.