WSJ: Ignore unemployment. Ignore inflation. Ignore the markets.

It’s no surprise that the Wall Street Journal would want the Fed to ignore the plight of the unemployed.  After all, they want the Fed to focus like a laser on inflation.  Or they used to want that.  Now that the Fed’s favorite inflation index (PCE) is running 0.7% over the past 12 months, and 1.05% for core inflation, the WSJ no longer wants the Fed to target inflation.  How do I know?  Because they have a long editorial on monetary policy that doesn’t even mention inflation.  And they favor a tighter policy, whereas inflation targeting would obviously call for an easier policy.

Ever since the supply-side revolution of the 1980s, the WSJ has been enthralled by the “market signals” approach to policy.  Every time stocks rise on rumors of a capital gains tax cut, they say that’s proof that lower capital gains taxes are good for the economy.  And when stocks fall on news of some misguided Obama administration initiative, that shows the folly of socialism.  Or at least they used to believe that.  But now that the markets are clearly indicating that the Fed’s tapering plan is a big mistake, the WSJ sings a different tune:

This time, the Federal Reserve can’t afford to blink.

Since the financial crisis, the Fed has repeatedly found itself forced to respond to markets, rather than lead them. This has usually taken the form of sharp selloffs that demand the Fed ride to investors’ rescue.

During the bleakest crisis days, the Fed often had little choice but to give in. Now, as markets again throw a tantrum upon hearing the Fed may soon start scaling back, it must hold firm.

In fairness, David Reilly does admit that the Fed would need to step in if there were a major market meltdown.  But I read the entire piece and still don’t have a clue as to what variables he thinks the Fed should be targeting.

Every news editorial on the Fed should be written as follows:

1.  I believe the Fed should target X (which might be a weighted average of several variables.)

2.  Going forward, the Fed is likely to (hit, overshoot, undershoot) X.

3.  Therefore the Fed should (stay the course, tighten, ease) policy.

Most editorials fail to do this, but the WSJ piece is a particularly egregious example.



17 Responses to “WSJ: Ignore unemployment. Ignore inflation. Ignore the markets.”

  1. Gravatar of J J
    24. June 2013 at 06:41

    As I said before, it is the caffeine theory of monetary policy. According to proponents of this theory, we are usually better off saving monetary stimulus for later. The longer you go without caffeine, the more effective and safer it will be when you have a cup of coffee. Sometimes you are very tired and have to give in, but that is regrettable and must lead to less caffeine consumption in the near future to prevent addiction.

    These proponents are stuck in a 60s/70s era way of thinking about monetary policy in which there is a tradeoff between two bad things, inflation and unemployment.

  2. Gravatar of Ashok Rao Ashok Rao
    24. June 2013 at 07:19

    This reminds me. I used to think market monetarists were right conservatives who could bring their ilk broadly to the left with a greater focus on employment and easy money.

    It seems a bit more nowadays like they are well on the left, bringing fiscalists to the right on how much stimulus is necessary and the importance of monetary offset.

    The only quibble is the existence of liquidity traps but that is purely an economic, not ideological, view. Unfortunately, the WSJ is ideological and not economic in nature. (They also support erosion of liberties, ignoring global warming, and rabidly fighting random wars – not hallmarks of civil libertarianism).

  3. Gravatar of Ashok Rao Ashok Rao
    24. June 2013 at 07:23

    Of course, many on the ideological right, argue that people like delong and krugman are just using stimulus as an argument for a permanent increase in interventionist government. And they probably *do* favor that (separately).

    But we have zero reason to believe their advocacy for fiscal stimulus is anything but economic in nature, and therefore the liquidity trap is not a subtle means for communism, or whatever.

  4. Gravatar of ChargerCarl ChargerCarl
    24. June 2013 at 07:24

    The target for VSP’s isn’t x% inflation or Y% unemployment, its just tighter monetary policy. The story is always the same, the FED should stop its asset purchases and raise interest rates because something…something…

  5. Gravatar of Steve Steve
    24. June 2013 at 07:39

    I think this editorial was already published in the WSJ… in SEPTEMBER 2008.

    Can’t find the link offhand, but they hard a very forceful editorial back in Sept 2008 saying that the markets needed discipline and the Fed couldn’t afford to blink in the face of a market tantrum…

  6. Gravatar of Bob Bob
    24. June 2013 at 09:17

    This should teach you how to write popular editorials. The trick is not to find some action that you favor and then explain why it’s good: That works based on rationality, and that doesn’t sell papers. Instead, find out a position held by someone your readership hates, and suggest doing the opposite.

    Given that the democrats want stimulus (sure, fiscal instead of monetary, but still, stimulus), asking for cuts everywhere is going to sell.

    It’s fortunate that no liberal thinkers are clamoring for good weather and longer Christmas holidays, because otherwise the WSJ would try to put the White Witch in office: Always winter, never Christmas.

  7. Gravatar of maynardGkeynes maynardGkeynes
    24. June 2013 at 09:49

    It looks to me like the market is simply reacting to the end of the carry trade musical chairs game, rather than telling us something important about the wisdom (or lack thereof) of Fed policy. I think it would be a mistake to react to quickly to the market swoon. I hope the Fed just keeps its eye on the real economy, not the gyrations of the Wall St. Traders. I doubt that large pension funds/endowments are involved in the selloff as they have a long term outlook.

  8. Gravatar of TallDave TallDave
    24. June 2013 at 11:00

    Argh. This is just awful by the WSJ.

    “Keep stabbing yourself in the face, you’ll feel better soon!”

  9. Gravatar of TallDave TallDave
    24. June 2013 at 11:04

    Ashok — I’ve never met a civil libertarian who thought the proper response to global warming was a multi-trillion-dollar government intervention to reduce emissions (and with good reason, there’s no scientific basis for reliably predicting climate within the relevant range, nor does present emissions control make more economic sense than future mitigation).

  10. Gravatar of ssumner ssumner
    24. June 2013 at 12:27

    Everyone, Lots of good sarcasm.

    Ashok, Don’t underestimate the influence of MM. We’ve made inroads into the conservative community.

    maynardGkeynes, You mean they should keep their eye on the NOMINAL economy. 🙂

  11. Gravatar of Ashok Rao Ashok Rao
    24. June 2013 at 13:10

    No, TallDave, the civil libertarian makes the very obvious deduction that the government needs to be financed somehow, it may either come from something that is definitely not productive and possible apocalyptic (carbon tax) or something that is productive and welfare-distorting (income tax). And from this very clear deduction he finds the Grover Norquist anti-any-and-all-tax proposition to be laughable.

    Scott, you said “Ashok, Don’t underestimate the influence of MM. We’ve made inroads into the conservative community.” I don’t doubt the influence of MM. Though I think history will decide *where* that influence is. Do you really see yourself going in future history books, along with Pethokoukis, Avent, or Wren-Lewis (who I know supports fiscal stimulus, granted) as “conservative” – at least when it came to your crisis?

    There is less space between the lay liberal and intellectual liberal when it comes to fiscal stimulus than there is between the lay conservative and intellectual conservative when it comes to monetary stimulus. Far, far less.

    I may be wrong, let’s see. (In any case, I am not doubting MM’s influence on a group of very important people).

  12. Gravatar of TallDave TallDave
    24. June 2013 at 17:22

    Ashok — What an odd statement, obviously fossil fuel energy is productive. If you want an apocalypse to worry about, look at a graph of geologic time, it’s only warm enough to support human civilization about 5% of the time and the next ice age is not predictable. I’m old enough to remember half a dozen “crises of our times” that came to nothing. Also, Grover Norquist does not advocate zero taxation, he opposes new taxes.

  13. Gravatar of TallDave TallDave
    24. June 2013 at 18:01

    BTW you should check out Tetlock 2005, there’s a long history of this sort of thing, and expert predictions have a very poor track record.

  14. Gravatar of ssumner ssumner
    25. June 2013 at 05:08

    Ashok, They say the NYT is the first draft of history. Here you are:

    “The prescription fits the worldview of some “monetarist” economists, who argue that the Fed should set a higher target for the nominal gross domestic product, to be met through real economic growth and inflation. Conservative pundits like Josh Barro of Business Insider have welcomed inflation as the right’s answer to fiscal stimulus “” a way to juice the economy without increasing government spending.

    But it is hardly a conservative idea. Paul Krugman, a Nobel laureate and liberal columnist for The New York Times, has been writing about the benefits of higher inflation, arguing that policy makers should be using any available tool “” fiscal or monetary “” to try to reduce an unemployment rate stubbornly stuck at more than 7.5 percent for over four years.”

    Yup, conservative.

    (I actually call myself a right wing liberal.)

  15. Gravatar of Ryan Ryan
    25. June 2013 at 05:31

    Ashok–Even people who agree about the science of global warming can disagree about policy prescriptions. The welfare effects of warming are heterogeneous across region, occupation, etc, and the costs of policies are uncertain (or at least debatable).

    Scott–thank you for this:

    1. I believe the Fed should target X (which might be a weighted average of several variables.)

    2. Going forward, the Fed is likely to (hit, overshoot, undershoot) X.

    3. Therefore the Fed should (stay the course, tighten, ease) policy.

    That’s brilliant. I find myself in this argument all the time–people who want tightening despite the Fed still being on the tight side of its objectives. Anyone arguing such needs to have an alternative objective in mind.

  16. Gravatar of J J
    25. June 2013 at 05:33

    It’s absurd to call opinions on monetary policy left-wing or right-wing. The disagreements are about economics, not philosophy or politics. On the other hand, opinions on fiscal stimulus can be left-wing or right-wing because support of fiscal stimulus may rely on a fundamental left-wing trust in the government to take control of economic activity.

  17. Gravatar of ssumner ssumner
    26. June 2013 at 05:57

    Thanks Ryan.

    J, That’s right, and even on fiscal stimulus, the right often supports tax cuts in recessions, and the left often opposes them.

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