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The consequences of Central Bank inaction


Monetary economist Adam Posen's speech (pdf) counseling more aggressive action from central banks is worth reading in full, but people should pay particular attention to this part:

Periods of persistently sub-potential growth and underemployed resources erode political moderation and the liberal governments we also must pass on to future generations. Let us not forget that it was sustained high employment and austerity, the sense that governments were unresponsive to average people’s dire economic conditions, which led to the rise of extremist intolerant parties in pre-war Europe. As we have seen sparks of late, thankfully limited, it can also lead to less liberal economic relations between nations, or even trade wars.

Posen is speaking to a European audience, but let's talk about America. In 1999, only 30 percent believed free trade had hurt America. In 2007, that had risen to 46 percent. Now, it's at 53 percent -- a solid majority. And among two of the most politically active constituencies -- tea parties and unions -- that sentiment passes the 60 percent threshold. If things continue to not get better, it'll rise further, and you'll increasingly see the political system respond.

In fact, you already are. In the House, a bill slapping tariffs on China passed with an overwhelming majority. In the Senate, Democrats abandoned a vote on the Bush tax cuts to push anti-outsourcing legislation giving companies a tax break if they fired foreign workers and hired American workers. That bill, they figured, would be the most popular item they could push in the weeks before the midterms.

The Federal Reserve appears to believe that the downside of slow growth is nothing more than slow growth. So long as the numbers are pointed in the right direction, getting back to trend slowly isn't much of an emergency. They may want to rethink that view. Among the problems with slow growth, Posen warns, is its potential to spark "a political reaction that could undermine our long-run stability and prosperity." And though there's a lot the Federal Reserve can do to fix our economic problems, there's much less it can do to fix our political problems.

Photo credit: Joshua Roberts/Bloomberg.

By Ezra Klein  | September 30, 2010; 4:33 PM ET
Categories:  Federal Reserve  
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A possible consequence of using power is having that power taken away from you for mis-use. What the Fed needs to realize is that, politically, it has to chose between using its power to do something and using its power to do nothing.

Posted by: ctown_woody | September 30, 2010 6:42 PM | Report abuse

"So long as the numbers are pointed in the right direction, getting back to trend slowly isn't much of an emergency."

Slow economic growth and long-term unemployment doesn't seem to be viewed as critical by Pres. Obama or the Congress either. As elected representatives of the people, they would be the first to feel the impact of "'a political reaction that could undermine our long-run stability and prosperity.'" So why would the Fed stick out its neck?

The long-term unemployment problem today is a lot like homelessness during the Reagan era. The powers-that-be appear to be shrugging their shoulders and hoping that the US economy recovers fast enough to solve the problem without massive gov't intervention.

Posted by: tuber | September 30, 2010 6:59 PM | Report abuse

So you favor loose monetary policy in order to bolster popular belief in some particular political and economic policies which have failed to impress significant segments of a democratic population, dangling the specter of a descent into fascism as a scare tactic if there is a failure to act?

People like you and Posen are why some people want to abolish central banks or work continually to make them more independent. Its not the job of monetary authorities to defend a given political consensus, even when people who wish that were the case trot out the most laughably extreme scare tactics concerning the potential consequences of their failing to do so. Shall central banks now start acting on every whim of the idiotic chattering classes when they become concerned about poll measured acceptance of their favored policies and choose to resort to extreme hyperbole in their defense of improper politically motivated monetary actions to increase support? Will everything now become "do this, or the Nazi's will come back", or "do that, or a world war will erupt"?

And in fact, just how did that destabilizing hyperinflation in interwar Germany come about? Loose or tight policy? How would it turn out here in the United states if every time Ezra read a poll he didn't like he successfully demanded the Fed prime the pump to make people more amenable to the political status quo?

Posted by: mrnegative | September 30, 2010 7:24 PM | Report abuse

Posen might be right, but I the Fed should only be making decisions based on the economy. They're an independent entity from the White House or Congress so that they will deal with the economy in unpolitical terms. Elected politicians should be making the political decisions and then taking action ... oh, wait a minute ... politicians taking action ... I think Posen may have a point.

Posted by: gaaallen | September 30, 2010 7:44 PM | Report abuse

--"So you favor loose monetary policy in order to bolster popular belief in some particular political and economic policies which have failed to impress significant segments of a democratic population, dangling the specter of a descent into fascism as a scare tactic if there is a failure to act?"--

That would be Klein, precisely. There is no stupidity he won't utter in service to the behemoth state.

Posted by: msoja | September 30, 2010 9:00 PM | Report abuse

Ezra, I hope for your sake that you are not an atheist, 'cause who else are you going to turn to when Obama and the Fed can't kiss and make it better.

Posted by: bgmma50 | September 30, 2010 11:51 PM | Report abuse

Those in power in the Fed are the same as those at the top of the private fiancial system. There is no urgency for them as they are not the ones unemployed or losing their homes. Monetary policy should be loosened during periods like this. I would guess those of you who would complain about it are also very well off.

Posted by: Falmouth1 | October 1, 2010 5:45 AM | Report abuse


Slow growth is not what's causing these vehement reactions by the tea party and the agitated militias, etc.. It's the fact we have a black man as President that's doing it.

You seem to paint a picture here that solutions to big problems can only be effected once the right-wing nuts get passionate enough to make the elite worried enough to react. I.e. no matter how many Krugman's or Michael Mann's or Talib's (or Ezra's) are around pointing out problems and solutions, nothing will get done until the system is faced with populist anger of one form or another. And perhaps you are right.

This would imply our elected officials aren't there looking after our mutual interests, but instead over some hidden interest.

This would also mean every learned word uttered by anyone outside the system, no matter how wise (or not) is a waste of time because in fact this is not a Democracy and instead we are all enslaved to the interests of the elite and the wealthy and the puppets they elect to look after their interests.

We are facing a coup this November, made possible by Citizen's United and the corporate media, and this coup is every bit as real as that one last year down in latin America recently when that President was thrown out of office by the wealthy elite because he had dared to try to care for poorer interests.

This election/coup in November is about the wealthy reasserting its grip and putting a stop to attempts to stop the redistribution of money from the middle-class to the wealthy. Many of the commenters here are too stupid to realize they are being played as fools by the wealthy and the elite as they support the very idiots and policies that are causing their own downfall and diminishment.

Because of John Roberts and a new activist Court that is looking after the interests of foreign corporations more than Americans, the 2008 election will be seen as the last fair election in US history. Millions of corporate dollars are now being poured into this election (much of it by foreigners, and probably a lot of it by Saudi Arabia) to elect goofballs who believe we need to dismantle the US gvmt and any policy meant to ensure fair business so that transnational corporations and oil companies can continue to run amok in our land.

If you think the Joe Millers and ODonnells wont rewire the system after getting elected to ensure their continued empowerment, you just aren't paying attention. Citizens's United is one example how they are going to "fix" the system to ensure that no one gets "elected" that the Saudi or British kings/queens don't want elected.

And if you haven't figured out by now the Federal Reserve is unconstitutional and serves the interests only of the powerful, then again, you aren't paying attention. People like Alan Grayson challenged the Fed recently and now vast sums of money is appearing out of nowhere to defeat these "pests."

Goodbye America. It was nice while it lasted.

Posted by: Lomillialor | October 1, 2010 7:01 AM | Report abuse

"there's a lot the Federal Reserve can do to fix our economic problems"

No, there's not. The Fed can give a short term jolt, but that's about it. The Fed's job is to keep the currency stable. It does not possess some sort of magic wand that it can waive in the ear, or ruby slippers that it can click together, that will solve our fundamental economic problems. The impact of Fed moves on fundamentals is transitory at best.

Posted by: ostap666 | October 1, 2010 8:43 AM | Report abuse

Ezra writes: "If things continue to not get better, it'll rise further, and you'll increasingly see the political system respond."

That is the way it should be. I know you ivy league types have a nice theory about 'free trade', which isn't about free trade at all (it chooses winners and losers in each country, more below). But, the masses don't care about theories. They care about results.

The results are that US manufactures very little of what consumers buy. It's is so utterly visible in our everyday lives, that denial is just silly. So, the political system (who doesn't serve the unwashed masses) avoids the topic, and finally agrees on something when it does arise. It's almost like it is uncouth to run on the issue, though I haven't seen the memo explaining that.

The original 'free trade' agreement choose to send manufacturing to Mexico, but allowed enormous subsidies in the US Ag system. Why? Well, the US middle class (who was getting pretty uppity, and was the most organized) was doing manufacturing. While, the mexican middle class that was the most organized, and faring the best, were farmers. So, by undermining both nation's workers who were actually succeeding, it created a two-fer.

Today, the (former middle class) mexicans who come over the border are jeered. But, it was our trade policy that led to them losing the farm (literally). You can't have one gov paying 2/3rds teh cost of corn, and then call it a free trade agreement -- unless you are dealing with the American media.

I hope our intellectual leaders start thinking about those things (or caring), but I will not hold my breath.

Posted by: rat-raceparent | October 1, 2010 10:15 AM | Report abuse

Finally a discussion of fiscal austerity measures having (potentially serious) social consequences! 'Bout time!

The West is on the cusp of losing all the advantages it gained following the demise of the Soviet Union.

Ironic that it's only just been 20 years since the German reunification.

Posted by: leoklein | October 2, 2010 11:41 PM | Report abuse

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