The Incredible Credibility Problem

A blog about business and economics.
June 8 2012 3:24 PM

The Incredible Credibility Problem

One area in which I think some prominent left-of-center voices have gone badly awry is in suggesting that the Federal Reserve faces some serious credibility problem in attempting to reflate a depressed economy. Paul Krugman's famous  line about trying to credibly promise to be irresponsible is funny, but I think makes the issue sound more paradoxical than it is.

The paradoxical formulation is this: If the Federal Reserve would raise its inflation target, that would boost growth. But once the growth is in place, maybe the Fed would prefer to not have the extra inflation. So if people think the Fed would responsibly backtrack in the face of success, then the expectations-management strategy won't work. So how can the Fed promise to be irresponsible in the future? Then we start talking about delivering monetary policy statements while drunk or wearing a Hawaiian shirt.


The non-paradoxical formulation is that the responsible way to behave is to live up to your promises. If a bunch of serious-looking public officials say "we promise not to raise short-term interest rates unless inflation goes above 5 percent or unemployment falls below 6 percent" then precisely because they have a reputation for seriousness people will doubt that they would throw their reputations away by backing out of their commitment. If the officials in question want to further increase the credibility of their promise, they can hire a lawyer and get a form drawn up where each of them contractually obligates themselves to write a $100,000 check to the United States Treasury if they violate the terms of their no-rate-hike agreement. Now it's true that the Board of Governors can't promise that congress won't impeach them all or whatever, but in life there are never any really absolute guarantees.

The point is that the problem of promising and social trust is a pretty general one, and it's precisely people with a reputation for sober-minded seriousness who have the least trouble getting their promises taken seriously.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.



More Than Scottish Pride

Scotland’s referendum isn’t about nationalism. It’s about a system that failed, and a new generation looking to take a chance on itself. 

What Charles Barkley Gets Wrong About Corporal Punishment and Black Culture

Why Greenland’s “Dark Snow” Should Worry You

Three Talented Actresses in Three Terrible New Shows

Why Do Some People See the Virgin Mary in Grilled Cheese?

The science that explains the human need to find meaning in coincidences.


Happy Constitution Day!

Too bad it’s almost certainly unconstitutional.

Is It Worth Paying Full Price for the iPhone 6 to Keep Your Unlimited Data Plan? We Crunch the Numbers.

What to Do if You Literally Get a Bug in Your Ear

  News & Politics
Sept. 16 2014 7:03 PM Kansas Secretary of State Loses Battle to Protect Senator From Tough Race
Sept. 16 2014 2:35 PM Germany’s Nationwide Ban on Uber Lasted All of Two Weeks
The Vault
Sept. 16 2014 12:15 PM “Human Life Is Frightfully Cheap”: A 1900 Petition to Make Lynching a Federal Offense
  Double X
The XX Factor
Sept. 15 2014 3:31 PM My Year As an Abortion Doula
  Slate Plus
Slate Plus Video
Sept. 16 2014 2:06 PM A Farewell From Emily Bazelon The former senior editor talks about her very first Slate pitch and says goodbye to the magazine.
Brow Beat
Sept. 16 2014 8:43 PM This 17-Minute Tribute to David Fincher Is the Perfect Preparation for Gone Girl
Future Tense
Sept. 16 2014 6:40 PM This iPhone 6 Feature Will Change Weather Forecasting
  Health & Science
Sept. 16 2014 1:39 PM The Case of the Missing Cerebellum How did a Chinese woman live 24 years missing part of her brain?
Sports Nut
Sept. 15 2014 8:41 PM You’re Cut, Adrian Peterson Why fantasy football owners should release the Minnesota Vikings star.