The Easy Politics of Monetary Stimulus

This is backfill from last week, but I gather based on the commentary following Ben Bernanke’s press conference that a lot of people think there would be significant resistance from the median voter to central bank strategies to stimulate the economy by reducing real interest rates. Insofar as these kinds of worries are in fact weighing on the minds of Fed officials, it shows two things.

One, complete and utter dereliction of duty. If Fed staffers, regional presidents, or board members are going to abandon the theory of the independent central bank and start conducting monetary policy according to their guesses about short-term public opinion polling, they really ought to just resign.

Second, an almost shocking lack of imagination. It’s true that the public reaction to a lot of talk about “inflation” might be bad. But if that’s the problem, there’s no need to use the word. Just say, “I want to raise the nominal incomes of American households back to their pre-crisis trend as rapidly as is practical.” The man on the street will find this, at the very worst, to be somewhat confusing. Then since I’m not a believer in pure targeting magic, I think you probably have to do some asset purchases to show that you’re serious. Then, after the next meeting, note the progress you’ve made toward catching up to the nominal income trend, restate your intention to raise nominal incomes back to the trend level as rapidly as is practical, and possibly do some more asset purchases. In practice, rapid growth in nominal incomes will (among other things) involve higher prices since incomes are made of prices. But there’s no need to lead with your chin even if you do want to completely ignore your professional responsibilities and let short-term political considerations dominate your policymaking.