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

187981236
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.

Advertisement

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.

TODAY IN SLATE

History

Slate Plus Early Read: The Self-Made Man

The story of America’s most pliable, pernicious, irrepressible myth.

Rehtaeh Parsons Was the Most Famous Victim in Canada. Now, Journalists Can’t Even Say Her Name.

Mitt Romney May Be Weighing a 2016 Run. That Would Be a Big Mistake.

Amazing Photos From Hong Kong’s Umbrella Revolution

Transparent Is the Fall’s Only Great New Show

The XX Factor

Rehtaeh Parsons Was the Most Famous Victim in Canada

Now, journalists can't even say her name.

Doublex

Lena Dunham, the Book

More shtick than honesty in Not That Kind of Girl.

What a Juicy New Book About Diane Sawyer and Katie Couric Fails to Tell Us About the TV News Business

Does Your Child Have Sluggish Cognitive Tempo? Or Is That Just a Disorder Made Up to Scare You?

  News & Politics
Damned Spot
Sept. 30 2014 9:00 AM Now Stare. Don’t Stop. The perfect political wife’s loving gaze in campaign ads.
  Business
Moneybox
Sept. 29 2014 7:01 PM We May Never Know If Larry Ellison Flew a Fighter Jet Under the Golden Gate Bridge
  Life
Atlas Obscura
Sept. 30 2014 10:10 AM A Lovable Murderer and Heroic Villain: The Story of Australia's Most Iconic Outlaw
  Double X
Doublex
Sept. 29 2014 11:43 PM Lena Dunham, the Book More shtick than honesty in Not That Kind of Girl.
  Slate Plus
Slate Fare
Sept. 29 2014 8:45 AM Slate Isn’t Too Liberal. But… What readers said about the magazine’s bias and balance.
  Arts
Brow Beat
Sept. 29 2014 9:06 PM Paul Thomas Anderson’s Inherent Vice Looks Like a Comic Masterpiece
  Technology
Future Tense
Sept. 30 2014 7:36 AM Almost Humane What sci-fi can teach us about our treatment of prisoners of war.
  Health & Science
Bad Astronomy
Sept. 30 2014 7:30 AM What Lurks Beneath The Methane Lakes of Titan?
  Sports
Sports Nut
Sept. 28 2014 8:30 PM NFL Players Die Young. Or Maybe They Live Long Lives. Why it’s so hard to pin down the effects of football on players’ lives.