Richard Epstein Says Monetary Policy Has Been Too Loose Forever

A blog about business and economics.
Nov. 26 2013 10:09 AM

Richard Epstein Says Monetary Policy Has Been Too Loose Forever

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Someone who, unlike Richard Epstein, knows what she's talking about.

Photo by Brendan Smialowski/AFP/Getty Images

A lot of what passes for right-of-center business cycle economics is, I think, best thought of as bullshit in Harry Frankfurt's sense. The conservative economist knows that the American economy is overtaxed and overregulated and knows that the vast majority of government spending is waste. He knows that slashing taxes, slashing regulation, and slashing spending will boost growth rates. And he knows that regulation and redistribution are immoral. So the point of any business cycle "analysis" is really just to wave past any notions of how to boost growth and create jobs on the demand side in order to return to the core ideas of cutting taxes, cutting regulations, and cutting spending.

That's the only way to understand Richard Epstein's bizarre take on Janet Yellen, which involves an awful lot of careless hard-money derp before reaching Epstein's actual point—he wants to slash regulation and spending. And good for him! But the actual monetary policy commentary is ridiculous.

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Consider (emphasis added):

The rubber only hits the road when labor and monetary policies diverge. A sound monetary policy normally requires one to keep interest rates at about 2 percent over inflation. The constant pressure to create new jobs is said to require interest rates to be set far lower. So which is it? The only way to make the appropriate tradeoffs is to adopt some overarching measure of social utility or welfare that reduces both elements to a single variable. Thus if employment objectives were 40 percent of the problem and monetary objectives 60 percent, 50 percent more weight should be attached to the latter. Implementing these dual missions will therefore raise difficult empirical problems, but at least the conceptual barrier is overcome. Unfortunately, the Fed just ducks this issue, as it fumbles along.

Not only did Epstein pull this rule of thumb out of his ass, a cursory check reveals that the Federal Reserve has never come close to following this rule:

epstein2

The blue line is PCE inflation + two percentage points and the red line is the federal funds rate. Does Epstein think monetary policy was much too tight in the late 1970s?* Obviously not. But what I'm sure Epstein does think is that the American economy has been consistently overtaxed and overregulated since 1959, so he doesn't actually care to get the facts about monetary policy and the business cycle right. He just knows that the real way to create jobs is to slash spending and slash regulation and thinks talking about other stuff is a distraction. He's a smart man. He obviously could look this up if he wanted to. He just doesn't want to.

Correction, Nov. 26, 2013: The original version of this chart mistakenly showed the change in the federal funds rate rather than the level of the federal funds rate.

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