Free Markets

Good Economic Policy Is About More Than Inflation

Monetary policy can't work optimally until we free up the economy in other important ways.


This time last year, we were in the depths of a global crisis. A mysterious disease was sweeping across the world, and governments shut down economies in an attempt to stop the spread. Right or wrong, these shutdowns brought our lives and livelihoods to a grinding halt. The unemployment rate in the United States reached nearly 15 percent, and measures of "underemployment" reached as high as 23 percent. Total wages and salaries fell by 6.5 percent in a single quarter.

The Federal Reserve took extraordinary action to cushion the fallout. Today the Fed is tolerating higher inflation to accelerate the recovery. But the time for this temporary overshooting is coming to an end.

Many libertarians are uncomfortable with the very existence of the Fed. I appreciate their passion for sound money and human freedom. But the Fed does exist, and it can adopt policies that are better or worse. To raise money and credit growth in a recession, the Fed lowers interest rates. To slow their growth to stop inflation, the Fed raises interest rates. At its best, the Fed makes sure that money and credit can grow at an even keel, thereby promoting stable prices and maximum employment.

Our country's deteriorating long-run growth has brought interest rates close to zero, even in normal times. To give themselves room to lower interest rates during recessions, Fed policy makers choose to target an average of 2 percent annual inflation, not zero. They hope that low, stable inflation will pose little harm as long as households anticipate it. When the Fed falls short of that target, they overshoot to raise the average back to 2 percent. Otherwise, interest rates would fall closer to zero.

The inflation we're seeing today gets us back on track to price stability by offsetting the deflation and disinflation of the last 10 years. This is painful for families. It's like medicine: bitter, temporary, and—if correctly prescribed—necessary. Every worker should demand a cost-of-living adjustment. Inflation means your wages should rise, too. Frankly, not all of us will get it. That's a sacrifice we did not choose.

The question is what's worse: a small decrease in your inflation-adjusted salary, or longer and larger layoffs during recessions? The Fed is betting that a bit of inflation today saves jobs tomorrow.

This solution is not perfect. We must demand better. Most importantly, we need to get the economy growing again—real long-term growth, not just a bounce back from 2020. Higher long-term growth would raise interest rates away from zero, allowing the Fed to target true price stability without becoming powerless in recessions.

The key ingredient for long-term growth is higher productivity. But the Fed is powerless to raise productivity, except indirectly through the boons of a long-lived economic expansion. As Fed officials often emphasize, growth-promoting policies are squarely Congress' responsibility. But until growth strengthens, we may be stuck with 2 percent average annual inflation.

Fed Chairman Jerome Powell (who is up for reappointment soon) and other monetary policy makers know inflation has now averaged 2 percent for the past five years. They have accomplished the backward-looking part of their recovery strategy. It is now time to look ahead. With the unemployment rate under 6 percent and over $4 trillion in additional spending on the horizon, isn't it about time to turn monetary policy accommodation down from max? Like in years following the global financial crisis, they should allow the labor market to fully tighten, but recognize that the path back to 3.5 percent unemployment may be a slow and steady climb.

Everyone else's patience as we exit the depths of the crisis deserves to be rewarded.

NEXT: Citing Rising COVID-19 Cases, L.A. County Reimposes a General Mask Mandate and Threatens Additional Restrictions

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  1. Many libertarians are uncomfortable with the very existence of the Fed. I appreciate their passion for sound money and human freedom…
    That was nice.

    CHRISTOPHER M. RUSSO… advised top policy makers at the Federal Reserve on monetary policy
    Color me skeptical of your earlier statement.

    1. No shit. The whole screed is written as if the Fed actually knows what it is supposed to do, and how to do it, and that the economy is so simple and malleable that the Fed’s actions actually do what is intended.

    2. This is a new low for Reason. It doesn’t even pretend to address libertarian complaints about the Fed and in fact leans right into all the things libertarians complain about the Fed for.

      1. So… it’s typical Reason

      2. Agreed.

        Inflation is also a clandestine tax increase, since your capital gains aren’t inflation adjusted.

        To raise money and credit growth in a recession, the Fed lowers interest rates.

        Or in plain English, the fed bails out failed investors (at the expense of everyone else) by doing three things:

        1: Making it possible for them to borrow cheaply to offset their losses.
        2: Guaranteeing that they’ll never have to repay the full amount, since inflation will cut their liability by 20% every 10 years.
        3: Forcing everyone else to play this game by inflating away their savings and taxing away any successful hedge.

        The only “stability” the fed has created in my lifetime is the near-guarantee that whoever wrecks the economy today will come back like a zombie in five years and do it all over again.

      3. How many times am I going to have to point out that Park Slope Welchie Boy, Goth Fonzie Wop, and Mango are NOT libertarians in pretty much any way, shape, or form?

        1. KM-W was an anarchist while at Yale but then she went to work for The Weekly Standard and caught the Neo-cooties. She was fine here as a long-time “Junior Editor” but when it came time to put ol’ Matt and Nick out to pasture she sold her soul for Koch.

  2. What on earth did i just read?

    Reason is running puff op-ed pieces defending the glorious central planning of the Fed now?

    I’m at a total loss for words.

    1. They’ve been hosting left of center “guests” for a while now.

    2. Yep you read it correctly, they have been fluffing the prog left for a while.

      1. “A while” meaning only about the last 14 or 15 years or so.

  3. ‘The inflation we’re seeing today gets us back on track to price stability by offsetting the deflation and disinflation of the last 10 years.’ It may, or it may not. I will wager on the latter, all things taken into consideration.

    1. Who cares about “price stability”. Stop devaluing my dollars.

      1. You notice the bigger tradeoff?

        Fed can raise interest rates because the government spent a crap ton of money. His alternative to lower interest rates is massive federal debt.

        Which, BTW, is significantly more expensive if interest rates climb.

        Is he hoping the government will cause hyperinflation, thereby reducing the real cost of the money they borrowed before gas cost $10 a gallon?

        1. Hyperinflation is more than just a doubling of gasoline prices.

    2. What deflation of the last 10 years? The one on consumer electronics, maybe. Housing has gone way the hell up over the last 10 years even before covid. Same with eating out. Same with insurance and healthcare and upper education and utilities. Same with 1,000 other goods and services. Big screen TVs (that actually have gone down) are not a big part of anybody’s budget unlike necessities of living that have gone way up and constitute a huge portion of most people’s budget.

  4. I can never keep it straight. Are we supposed to maximize spending or sustainability? Economic output or pollution?

    1. I’d say not going extinct is high up on the priorities list. For most of us, anyway.

      1. ^Chicken-Little, “The sky is falling! The sky is falling!”

      2. Yes, the earth is becoming dangerously underpopulated.

    2. As Thomas Sowell says “There are no solutions, only tradeoffs.”

  5. Monetary policy is completely unnecessary and counterproductive.
    A good start would be to stop interfering in bond and mortgage markets. Curtailing or severely limiting deficit spending would be a big help too.

    1. I certainly agree that the solution to our economic stagnation is not going to be found in monetary policy. More like fiscal policy, as in how much our government is spending.

      Here’s my plan:
      1) Scrap the tax code in favor of a national sales tax around 25%. It will go down 1% per year until it hits 15%.
      2) End the war on drugs. Stop all the violence and put these kids to work in legitimate jobs. That will lead to property values going up in those inner cities, and businesses moving back in.
      3) Increase legal immigration levels by around 500%.
      4) Drop all our tariffs down to the cost of running Customs. Probably 1%.
      5) Universal school vouchers. Kill the unions and unleash the free market on education.
      6) Eliminate 2/3 of all occupational and professional licensing. Including child care and teaching.

      I’d say we’d be humming along at 5%+ for a few years.

      1. Close down all federal agencies created after 1960, make SS means tested, stop foreign interventions, and shut down all govt healthcare and go back to the pre ww2 system we had (associations providing health insurance). But I’m with you on the other items as well…

        Making competing currencies legal would help as well.

        1. End SS. If necessary, require workers to invest some funds into a retirement fund that they control, but make it *theirs*, not a government slush fund.

          Really, end all federal agencies created after ~1900. 1960 is too late.

            1. True. Instead, like all advanced civilizations before it, the US will go down the predictable path of socialism/fascism because that’s Weise reasonable adults like you want.

            2. You’re a fucking lefty ignoramus.

  6. Wow, this article amounts to a lot of question begging and some significant economic ignorance.

    Where do productivity gains come from? From businesses investing in future production. Why do businesses invest in future production? Because they see the potential for greater returns to investors by growing their business than by returning value to stockholders now. Now, obviously some of this is business-specific (ie, Amazon has made growth a major focus of its business model), but businesses in general have become very focused on short-term profits. We’re talking about economy-wide productivity gains, so maybe we should be asking what kinds of signals tell businesses generally that it’s time to invest in the future.

    Well, what does the interest rate do? Interest rates coordinate time and money (Hayek). That is, in a functioning money economy, when savings are low, interest rates go up to attract savings. When savings are high, interest rates go down. This functioning money economy drives investment in the future – either there are savings for future spending, or there are strong incentives to save money for future spending.

    Savings, of course, is also foregone spending today – not just money sitting around, but resources which aren’t consumed and available for investment in future production. Which makes future investment possible. (In a functioning money economy, spending + investment balances with production, because that money spent or invested was generated by the sale of produced goods or services – so invested dollars are produced goods which aren’t consumed).

    The problem with the fed’s management of the economy is it drains savings because it creates fake low interest rates when there are no savings. Consumption doesn’t go down today, so there aren’t resources available for investment in the future. This kills the incentives for businesses to look to the future, because they’re incentivized to produce as much as they can today rather than invest in more production tomorrow. There are few returns on investment when interest rates are near zero! So it’s no wonder businesses are more concerned about next quarter’s profits than investing for 5 years down the road – businesses aren’t stupid, they’re responding to the incentives government has given them.

    When the fed comes in and offers cheap money, it distorts signals about the amount of actual savings. It directly causes over-consumption, because that’s money injected into the economy that wasn’t produced from the production of goods or services.

    If you want productivity growth, stop depressing the interest rate. Encourage real savings.

    It sounds great to say it prevents job loss for the fed to (theoretically) even out the business cycle, but creative destruction is a key part to a functioning economy. There are jobs that *need* to be lost. Some short term pain is necessary for longterm gain.

    1. What happens when a fairly healthy economy runs into an unforeseen global disaster like a pandemic that forces people into their homes for months on end?

      Do we simply let the market make its signals and let millions of people lose their income because of something totally out of their control?

      You could say that it’s a distortion to keep movie theaters and restaurants afloat during a pandemic, since clearly demand has sharply dropped. But people still need to eat.

      Of course we could have much more robust market churn if starvation weren’t among the stakes. Put a floor on the level of poverty and we can have not only a freer market with more accurate signals, but a market operating at a more advanced level than people trading grunt work for ramen noodle money.

      1. The pandemic didn’t force people into their homes, governments did.

        1. Manifestly half-true at best. Some people are rational and chose not to expose themselves to a deadly virus all on their own accord.

      2. You mean in the 21st century we still haven’t invented a body-suit, mask, or other protective gear? Oh wait; No, that was invented a long time ago; today there is actually a vaccine.

        ^Chicken-Little Tony, “The sky is falling! The sky is falling!”

        1. Do I need to even mention that those who decide to weld without a welding helmet and get inflamed or permanently damaged retina’s it is NOBODIES FAULT BUT THEIR OWN!

      3. We already have a floor. No one in America is in danger of starvation unless they are deliberately starving themselves, or physically trapped somewhere without access to food.

      4. “What happens when a fairly healthy economy runs into an unforeseen global disaster like a pandemic that forces people into their homes for months on end?”

        Tony, you have described (at least in part), as I see it, the original intention of the Fed. The Fed was created to deal with unforeseen, and serious financial challenges, i.e., paying for a war, or perhaps a serious recession or depression — in other words, during an “emergency.”

        The problem is that the government, or at least many of the players in it, describe damn near everything as an “emergency,” and we end up dealing with a Fed which seems to try to “fix” the economy on a damn-near-daily basis. Without the the $20+trillion deficit, the shutdown due to the pandemic, even if it was necessary, would have been a blip on the screen.

        1. Not only that, but the fed actually made the great depression last longer, so it doesn’t even work as a response to ‘unforeseen disasters’.

          1. Many consider that a failure of FDR, and not a failure of the Fed.

        2. A global pandemic is a kind of emergency.

          1. Tony:
            “A global pandemic is a kind of emergency.”

            It certainly can be considered as such. Without getting into the efficacy of the government’s economic response, the fact is, with the debt structure as it is, and neither major party seeming to care about changing it, more than likely, our grand-children, and maybe even our great-grandchildren, will still be paying for it. The first World War ended over a hundred years ago, and we are still paying for that.

            1. We’re still paying for the entire modern technological world and the defeat of the Nazis in Europe? And I still can afford an iphone? Seems like a good deal to me.

              Not that I can find a line item on my taxes for The War, or that governments that issue fiat money can ever truly be in debt as we know it.

      5. It was government that forced people into their homes.

        It was government which made it impossible for businesses like restaurants to quickly adapt to new conditions. (Inability to sell raw food goods because they weren’t “properly packaged for individual resale”, inability to sell cocktails for pickup initially, etc…).

        Individuals and businesses are a lot more innovative than you give them credit for, if only government would get out of the way. And most of the working population had little reason to be forced into their homes in the first place. This last year was a disaster mostly because government made it a disaster. (And if it does turn out that Covid-19 had a lab origin, well, that’s a government lab in China with government funding…).

      6. The US already has a “floor on the level of poverty”, through its massive, insane social programs.

      7. “What happens when a fairly healthy economy runs into an unforeseen global disaster like a pandemic that forces people into their homes for months on end?”

        Sumbitch is just stupid, inn’e?
        Try this on for size, shitstain:
        “What happens when a really healthy economy runs into a bunch of Democrat tin-pot-dictator-wannabes?”
        Answer: They kill it.

      8. The solution is to end the pandemic. No added stimulus necessary.

    2. Interest rates don’t change to adjust savings rates. Savings rates result in interest rate changes….

      1. They feedback with each other. High interest rates -> higher saving rates, because people are incentivized to save. As savings go up, interest goes down.

    3. A damn fine explanation of how the real economy in a free country works and how central banks and the govt screw things up.

      The Fed should be immediatly shut down. Check clearing can be done by third parties. Banks should only have two types of deposits..demand where the money is never lent out and time deposits which are loaned out and are more like equity…they might provide a return and are 100% risk. Bank runs are irrelevant in this case and the “reason” publicly for the Fed goes away.

    4. Another way the Fed alters allocation of funds to “best” loans is by penalizing banks for not loaning money to minorities at the same rate as the general population, a form of social justice that overlooks ability to repay in favor of skin color. The standards for repayment should be colorblind and fact based, though in practice they can be discriminatory against people who “look” like they are poor credit risks. I don’t know of a good solution here, but the Fed’s approach is a faulty use of statistics, leading to some malinvestment on a national scale. Low interest rates are even more pernicious, as they lead to malinvestment on a massive scale (e.g., zero-down 5-year balloon loans for homebuyers who can’t really afford a home).

    5. Indeed. Curious that the author also advocates some short term pain as necessary but concludes that savers must accept inflation rather than that unproductive people should accept unemployment until their skills can be allocated to where they are truly needed by consumers.

  7. That’s great and everything Chris, but, what about my dollars that have been sitting in the bank all this time. They’ve gained no interest because the fed is addicted to 0 rate. Not to mention, general devaluation due to steady inflation. Wouldn’t want to unbalance the economy and God forbid a little deflation.

    1. Much of your savings, and everyone else’s has been stolen by the phony ‘emergency pandemic’ spending that was almost 90% a giveaway to democrat allies and pet projects. Our currency is so debauched now that inflation will e massive over the next few years.

    2. You did not keep that much cash. In five years NASDAQ Is up 182%.

      Keep cash for emergencies.

      1. And those gains are fake too.

        1. So are Warren Buffet’s.

          “ Price is what you pay. Value is what you get.”

          Value can not be measured in dollars. Went out yesterday on a popular lake here. Rented a nice boat and spent the day with the family. The kiddos collected some shells and rocks from the shore and had a great time swimming around. What is the value of that?

          So in investing buy shares in the company not the stock price. That is all I know.

          1. So in investing buy shares in the company not the stock price. That is all I know.

            Quite right. Unfortunately, many of those shares, in fact, have high prices but little value.

  8. Why should the Fed buy Federal Debt directly? Is that moral? Who does that help Chris? Public sector elites and “well connected.”

    The Fed doesn’t exist to fund the Federal Debt which has destroyed our industrial base via the need to have China eat our inflation.

    Inflation eats at society in horrible creates maleinvestments, enriches the well connected, breeds dishonesty, avarice and greed and rips apart families…inflation should never be tolerated..deflation is the natural result of real productivity increases..and this bs about “deflation” means people won’t spend is crap..your fridge breaks you buy a new don’t wait for prices to fall. Falling prices is a good thing. JC, Ron Paul knows more about economics than Powell, Bernanke, Yellen and any “economist” who follows the pedo Keynes..End the Fed..

    1. There’s so much deficit sounding that we long ago passed the point where there was enough demand to sell US debt.

    2. I love the idea that somehow Americans who buy new phones every year are going to starve waiting for bread to drop another $0.05.

  9. Reason is publishing this shit? Seriously..Keynsian crap…counter cyclical spending during recessions..come on Chris do you understand what causes business cycles? No it isn’t animal Mises for god sake. recessions are needed to clear out the system screwed up by central bankers/govt in the first place. Perhaps do a little research like the Great Recession of 1920 versus the Great might..just might learn something about economics…man what a dolt this guy is..

    1. Hint, hint; The Federal Reserve Act passed in 1913.

      A bill on how to crash an entire nations economy for decades over ONE single fraudulent malfunctioning bank in NYC.

  10. Reason “Free Minds and Free Markets” is your tag line and you publish this? Honestly Nick how can you publish this propaganda? You knew as soon as inflation hit you would get the following from the corporate media..”it is transitory”..that didn’t work so now its “inflations isn’t so bad”..I expect this propaganda from the NYT and even the WSJ but Reason? Can we get a Von Mises Caucus takeover of Reason please?

    1. Reason needs to go out of business. Maybe an actual libertarian magazine can then take its place rather than this crap.

  11. Actual libertarians: “abolish monetary policy and the fed”.

    Reason: “let’s optimize monetary policy!”.

  12. What the Hell is this piece doing in a supposedly libertarian publication? Where’s the libertarian rebuttal?

    How much longer is Reason going to continue pretending they’re still a libertarian publication? The pretense is getting pretty thin at this point.

  13. I defend Reason on a lot of issues but this was pretty terrible to read. The conclusions are sort of OK, ie ease up on credit expansion, but the reasoning is completely opaque. Eg why would increased productivity raise interest rates? This is left unexplained, perhaps because no explanation would make sense since the causation is backwards. When savings are low, interest rates rise. When interest rates rise, savings and productivity rise. When savings and productivity rise, interest rates fall again, which in turn causes savings to fall. The cycle repeats with tendency to converge on an interest rate that reflects social rate of time preference. And when you think about it this is the only explanation that works

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