Center for Popular Democracy — Fed Up Campaign 2015

Members of the Center for Popular Democracy coalition pose outside the Federal Reserve building in Washington, D.C., prior to meeting with Chair Janet Yellen in November 2014. (Photo courtesy of CPD)
Organization Name 
Award Date 
1/2015
Grant Amount 
$750,000
Purpose 
To support a campaign to educate the public and policymakers about monetary policy issues.
Topic (focus area) 

Published: February 2015

Center for Popular Democracy (CPD) staff reviewed this page prior to publication.

Note: This page was created using content published by Good Ventures and GiveWell, the organizations that created the Open Philanthropy Project, before this website was launched. Uses of “we” and “our” on this page may therefore refer to Good Ventures or GiveWell, but they still represent the work of the Open Philanthropy Project.

The Center for Popular Democracy is running a campaign (“Fed Up”) that aims to prevent premature tightening of monetary policy and encourage greater transparency and public engagement in the governance of the Federal Reserve. We previously contributed $100,000 to help the campaign get started.

While we remain uncertain about the campaign’s prospects for making an impact, it has demonstrated some preliminary success during the last few months. Our best guess is that the campaign is unlikely to have an impact on the Fed’s monetary policy, but that if it does, the benefits would be very large. Additionally, we see some value in the campaign’s call for greater transparency and public engagement in the selection of regional Federal Reserve Bank leadership, and in enabling CPD to experiment with an advocacy campaign in macroeconomic policy.

Based on these considerations, we decided to grant an additional $750,000 to the Center for Popular Democracy to support the Fed Up campaign. We anticipate that this grant will make up roughly 75% of the campaign’s overall funding for the year.

GiveWell staff member Alexander Berger has led our work on macroeconomic policy to date and was responsible for initial drafting of this page. Unlike much of our other output, the complexity of the debates in this area has made it impractical for other GiveWell staff to construct and check a complete trail of evidence and counterarguments for each claim in this review. (More on our process for forming and vetting the views contributing to this grant below.) As a result, while we stand behind the content of this page, the case for many of our beliefs has not been fully captured in what we’ve written up.

Background

Campaign overview

Fed Up is a campaign run by the Center for Popular Democracy in association with 19 other progressive national advocacy organizations, unions, think thanks, and regional community-based organizations.1 The campaign targets the Federal Reserve, and its stated goals are both substantive (to “create a strong and fair economy”) and procedural (to “create a more transparent and democratic Federal Reserve”).2

The campaign’s current projected budget for 2015 is around a million dollars, with spending breaking down roughly evenly between two components:3

  • Subgrants to 13 regional partner organizations.
  • National staff time (~75%), research support (~15%), and other campaign costs (~10%).

This budget was informed by our decision to commit $750,000; an earlier draft was about 50% more ambitious in terms of spending.4 In addition to our commitment, the campaign has also raised $100,000 for its 2015 operations from another foundation, and anticipates some continued fundraising into 2015.5

The campaign envisions a number of different potential activities, with substantial variation based on decisions made by regional partner organizations. These activities largely break down into two categories: efforts to make clearer to Fed decision-makers the humanitarian stakes of their decisions, and efforts to credibly demonstrate that decisions by Fed policymakers will be subject to substantial public scrutiny.6 CPD asked us to keep the lists of specific campaign activities they’ve considered confidential on the grounds that publication might undermine their effectiveness. Future updates will look back on the specifics of CPD’s activities.

Organization overview

CPD was formed from a merger of two smaller organizations (one of which was also called CPD) at the beginning of 2014.7 Their current annual budget is roughly $8 million, and they have an affiliated 501(c)4 organization (Action for the Common Good) with an annual budget of about $2 million; together they have about 50 staff members.8

CPD is a progressive national advocacy group that works with local community groups across the country to promote their agenda.9 About half of their funding comes from the Ford, Open Society, and Wyss Foundations, and relatively little of it is unrestricted.10

We have not investigated CPD’s track record in depth. Program officers for other foundations that we asked about CPD in informal conversations reported generally positive impressions. One example of a campaign that CPD reports was successful was the “Campaign for a Fair Settlement,” undertaken prior to the merger, which pressured the Department of Justice to pursue a sizable settlement against banks that played a role in the financial crisis.11

Overall, our view about this grant is driven far more by our view of the campaign than by our assessment of CPD as an organization.

Campaign progress to date

To date, the campaign has conducted two major public activities, largely aimed at driving press attention:

  1. Protests at the Federal Reserve’s August meeting in Jackson Hole, Wyoming.
  2. A meeting with Federal Reserve Board Chair Janet Yellen in Washington, D.C. in November.

Before the August protests at Jackson Hole, CPD and 70 other progressive advocacy groups issued an open letter calling on the Fed to keep interest rates low until wages rise further, which prompted some initial media coverage.12 The protesters at Jackson Hole were covered widely in the media, including stories in the New York Times, Washington Post, Wall Street Journal, Associated Press, Reuters, and Bloomberg News, amongst others, and the group met with Kansas City Fed President Esther George for about two hours.13 Binyamin Applebaum, a New York Times economics reporter who was at the conference, said, “Their presence has been mentioned repeatedly by Fed officials and speakers, suggesting that it has made an impression.”14

Prior to their November meeting with Yellen, CPD and partner organizations issued open letters calling for greater transparency and community engagement in the selection process for the new presidents of the Federal Reserve Banks in Philadelphia and Dallas (whose current presidents had both announced plans to retire in 2015).15 The meeting, and CPD’s press conference prior to it, again received widespread coverage, leading to articles in the New York Times, Wall Street Journal, Washington Post, Bloomberg News, and Associated Press, amongst others.16 Soon after the initial New York Times report about the open letters, the Dallas Fed announced the specific retirement date for their president and the name of the search firm hired to seek his replacement, while the Philadelphia Fed also announced the name of their search firm and set up a public-facing email to receive input.17 In addition, at the national level the Fed has publicly disclosed more information about the selection process for regional bank presidents and announced the formation of a new “Community Advisory Council.”18 The group’s meeting with Yellen triggered a response from those who hold different views about the appropriate stance of monetary policy, with a Wall Street Journal editorial condemning the effort and a conservative group holding a press conference outside the Fed to counter the campaign’s message.19 Some reporters writing about the meeting interviewed former Federal Reserve officials, whose reactions we would classify as mixed.20

Overall, we see these early actions as supporting two premises of the campaign, and reducing the risks associated with failure on either of these assumptions:

  • The campaign will be able to interact with Fed policymakers.
  • The campaign will be able to draw significant media coverage.

However, we continue to see the question of whether the campaign might have any more substantive impact as an open one.

Policy goals

Substantive goals

The campaign describes three substantive goals:

  • Good Jobs for All: The Federal Reserve should commit to building a full employment economy. It should keep interest rates low so that wages can rise significantly and everybody can find a good job.
  • Investment in the Real Economy: The Fed should use its existing legal authority to provide low- and zero-interest loans so that cities and states can invest in public works projects like renewable energy generation, public transit, and affordable housing that will create good new jobs.
  • Research for the Public Good: The Fed should study the harmful effects of inequality and examine how policies like raising the minimum wage and guaranteeing a fair workweek can strengthen the economy and expand the middle class.21

We wouldn’t necessarily endorse these priorities verbatim. We see the first one as the key substantive priority, and would summarize it as suggesting that Federal Reserve policy should be somewhat more dovish at the margin, i.e. erring on the side of keeping interest rates lower longer than it might currently plan to. We think that such a change would likely be very beneficial in humanitarian terms. However, monetary policy is extremely technical and subject to widespread disagreement, so we could fairly easily be wrong on the merits, a risk we elaborate on below.

Desirability of these goals on the merits

The central reason we believe that marginally more dovish Fed policy relative to the current baseline would carry net benefits is that, at roughly their current rates, we see unemployment as more costly in humanitarian terms than inflation. Our view comes partly from the impressions we’ve formed on following public debates on macroeconomic policy, and appears consistent with what we’ve found in a relatively cursory review of the literature:

  • Though there is empirical evidence that high levels of inflation (e.g. above 8%) harm economic growth, we are not aware of empirical estimates of the costs of inflation at relatively low values (e.g. under 5%).22
  • Model-based estimates of the welfare costs of inflation (typically fit to some kind of economic data) yield widely varying results, and we have not conducted a systematic review of the literature. Our impression is that estimates based on the demand for money suggest that overshooting on inflation by 1 point would lead to a welfare loss of between ~0.02% and ~0.07%.23 However, estimates based on dynamic models that incorporate non-inflation-indexed portions of the tax code can yield much higher results (e.g. welfare costs of 0.3-0.5% per point of inflation).24 Other prominent estimates based on relatively simple New Keynesian models suggest that central banks will maximize welfare by placing substantially higher weight (e.g. 10-20x more) on inflation stabilization than unemployment, due to the welfare costs of price dispersion caused by inflation, but don’t specify welfare costs of a point of inflation.25 (Our impression is that more recent work by the authors of these models tends to argue in favor of price-level or nominal GDP (NGDP) targeting, which, with the current price and NGDP level well below the pre-crisis trend, would argue in favor of continued expansionary monetary policy.26) Given the fairly wide range of findings and our lack of familiarity with the methods involved, we have not placed heavy weight on these findings.
  • We believe unemployment is directly costly in humanitarian terms, reducing happiness and income for the unemployed and their neighbors, with potentially adverse long-term impacts on human capital and we have seen some literature supporting this idea.27
  • Additionally, a slack labor market may reduce wage growth for lower-income people. This idea is intuitive to us, and we have seen some literature supporting it. Using data from 1989-2007, the Economic Policy Institute estimates that increasing unemployment by 1 point decreases annual nominal wages for the bottom decile of men by 1.96%, for the bottom decile of women by 1.49%, and for median wage men and women by ~0.9%.28 Katz and Krueger 1999 use data from 1973-1998 and a similar methodology to estimate that a one point increase in the unemployment rate reduces wages at the tenth percentile by 1.57% and at the median by 0.86%.29
  • Empirical research using subjective well-being assessments also supports the conclusion that unemployment should be weighted more heavily than inflation. Di Tella, MacCulloch, and Oswald 2001 uses survey data on life satisfaction from 12 European countries over the period 1975-1991 to estimate that a point of unemployment is 1.7 times as socially costly as a point of inflation.30 Using similar data and methods but a larger set of countries (16) and a longer time period (1973-1998), Wolfers 2003 estimates that a point of unemployment is roughly 4-5 times as socially costly as a point of inflation.31 Blanchflower et al. 2014 uses, again, a broader set of European countries (31) over a longer time period (1975-2013) and finds that a point of unemployment carries roughly 5 times as much social cost as a point of inflation.32 We’re not aware of significant literature arguing for the opposite conclusion based on subjective well-being data, though we have not conducted an exhaustive search.

While we believe that at current levels, a point of unemployment is more costly than a point of inflation, central banks cannot arbitrarily trade off unemployment and inflation: in the long run, efforts to permanently push unemployment too low would result in the unanchoring of inflation expectations and an inflationary spiral.33 However, inflation expectations are extremely well-anchored right now, with survey-based measures broadly stable at around the Fed’s 2% target and market measures of expectations generally below target.34 This suggests that the Fed should be able to keep rates low to further reduce unemployment while having only a small impact on inflation (and be pushing it in the desired direction—towards the 2% target).35 More generally, short run tradeoffs between unemployment and inflation are not believed to be 1:1. Conventional estimates tend to suggest that keeping unemployment a full point below the “non-accelerating inflation rate of unemployment” for a year would result in inflation 0.5 points higher for the indefinite future, with more recent research suggesting a somewhat lower tradeoff.36

In addition to this central argument from the welfare asymmetry of inflation and unemployment for keeping interest rates low when inflation is below target and expectations are well-anchored, we also see the risks from tightening too soon as outweighing the risks from tightening too late. The Fed’s recent experience struggling to provide sufficient monetary stimulus at the zero lower bound on nominal interest rates suggests that it is worth being disproportionately careful to avoid tightening too soon, in order to avoid a rapid return to the zero lower bound, and the attendant risk of not being able to stimulate adequately, in the future.37 Market participants currently estimate the probability of the Fed being back at the zero lower bound within two years of initially raising rates as roughly 20%.38 On the other hand, the Fed is capable of tightening more than currently planned in order to control inflation should it emerge later.

A relatively tight labor market seems unusually unlikely to prompt high inflation today because corporate profits are at a record high while the labor share of income is historically low, though if those factors are driven by secular trends, a tight labor market may cause inflation rather than shifting profits to wages.39

Finally, estimating the non-accelerating inflation rate of unemployment (NAIRU) is quite challenging and involves significant uncertainty.40 In the face of such uncertainty, testing the estimate to see whether unemployment below that level does in fact cause faster inflation could be prudent.41

Expert disagreement about these goals

The Fed is extremely technocratic and well-informed, but officials within it nonetheless disagree about the appropriate path of monetary policy. For instance, members of the Federal Open Markets Committee (FOMC), which is responsible for setting monetary policy, disagree substantially about the appropriate pace with which to tighten in the coming years.42

In this section, we try to describe why some Fed officials with access to all of the information above, plus substantially more professional expertise, might nonetheless not agree with us that policy should err on the dovish side.

The below bullet points give our best guess at the main forces in play, with examples of people arguing that these are significant forces in the footnotes:

  • Institutionally, the Federal Reserve sees the Volcker-era “victory over inflation” as its biggest success, and is reticent to run any risk of reversing it.43 More hawkish experts have regularly marshaled the example of 1970s-era inflation rates as a potential risk from keeping interest rates low (in spite of the fact that inflation expectations have remained well-anchored).44 (We think that more hawkish experts would react to this observation by defending the comparison to the 1970s and saying that recent Fed policy risks de-anchoring expectations.)
  • Based on some prominent macroeconomic models, economists have often accepted the idea that central bankers should focus on inflation rather than unemployment in order to maximize welfare.45 Our impression is that these intellectual arguments have been assumed to argue against more expansionary monetary policy, because they did so in the past, even though they typically support more expansionary policy when inflation is below target and anchored and there is a remaining output gap (as is the case today).46 (We think that more hawkish experts would react to this observation by defending the models that recommend a strong focus on inflation and pointing out that the conventional Taylor Rule would recommend a non-zero interest rate at today’s unemployment and inflation rate levels.)

We are not very confident in these guesses, though, and overall, would not say that we have a strong sense of what drives expert disagreement in this area. Commentators have offered a variety of other explanations.47

The more hawkish presidents of the Philadelphia and Dallas Federal Reserve Banks have given speeches recently outlining their positions (see footnote),48, while the more dovish presidents of the Chicago and Minneapolis Federal Reserve banks have also offered their perspectives (see footnote).49 We encourage readers to consider both arguments.

Political context

Separate from the arguments above on the merits, we see two other reasons to support a campaign around these policy goals:

  • In recent years, attention to and pressure on the Fed has come disproportionately from conservatives concerned about potential inflation risks, and less from liberals and those more concerned about unemployment.50 By amplifying more dovish voices, the campaign aims to bring the balance of popular attention to and pressure on the Fed into greater alignment with the distribution of expert opinion, and we see that as valuable. Were such voices already equally-represented in the popular discussion and advocacy around the Federal Reserve, we would be less likely to support this campaign.
  • Even if we are wrong on the merits, we believe that broader discussion and debate around these issues is genuinely useful, and likely to produce marginally better monetary policy. Also, we expect that a campaign aiming to influence policy is more likely to push policy in the desired direction if it is directionally correct, so even in the context of a priori uncertainty about which direction is desirable, increasing advocacy on one side of it is more likely to be beneficial than harmful.

Procedural goals

The campaign describes three procedural goals:

  • Ensure That Working Families’ Voices Are Heard: Fed officials should regularly meet with working families and community leaders, not just business executives, in order to get a more accurate picture of how the economy is working.
  • Fed Officials Should Actually Represent the Public: In regional banks around the country, Fed leaders come overwhelmingly from financial institutions and major corporations. The Fed should appoint genuine representatives of the public interest to these governance positions.
  • Create a Legitimate Process for Selecting Fed Presidents: In late 2015 and early 2016, the regional Fed banks will select their next presidents, who will serve five year terms. Currently, the process for selecting those presidents is completely opaque and involves no public input. That needs to change, so that the public has a real role in the selection process.51

We see these procedural goals as more unambiguously positive than the campaign’s substantive policy goals, though we struggle to evaluate how beneficial they would be.

Regional Federal Reserve Bank presidents, who attend FOMC meetings and vote on a rotating basis, are selected by their boards of directors.52 Each board has 9 members:53

  • 3 Class A directors, elected by member banks to represent their interests
  • 3 Class B directors, elected by member banks to represent the public
  • 3 Class C directors, appointed by the Board of Governors in Washington to represent the public.

Only Class B and Class C directors are allowed to vote on the selection of regional bank presidents, and their appointment is subject to approval by the Board of Governors.54 The substantial role of Class B directors, who are elected by member banks, in selecting regional bank presidents strikes us as hard to justify.

While we don’t see a huge amount of direct utilitarian consequences for this consideration, there seems to be a strong procedural presumption in favor of a more credible, transparent selection process for regional Federal Reserve Bank board members and presidents.

Outside influences on the Federal Reserve

The Fed is an independent institution with wide authority over monetary policy. It is under no particular obligation to listen to a campaign by members of the public, and given its technocratic bent, may be particularly disinclined to do so.

To assess the likelihood that this campaign might be able to able to have an influence, we reviewed the literature on FOMC decision-making and considered the campaign’s specific plans.

The literature in this area consists of both reporting by journalists and (former) Fed officials, historical accounts based on vote data and meeting minutes, and econometric analyses, typically of the historical vote data. We attempted to read broadly in that literature, but we have not been exhaustive, and we have not reviewed the econometric evidence with the same depth and skepticism that we typically do in the context of top charities.

Research and reporting on FOMC decision-making

The role of the Chair

Most academic research suggests that Chairs carry disproportionate weight in the deliberation and votes of the FOMC. Quantitative and qualitative assessments of the Arthur Burns-era FOMC suggest that he accounted for around 40-50% of the FOMC’s decisions, while Alan Greenspan seems to have effectively dominated his FOMC, accounting for nearly 100% of its decisions.55 Less information is publicly available on the Bernanke and Yellen tenures, but they seem to both have more consensus-oriented styles that would put them closer to the Burns end of the spectrum (or perhaps even further along towards carrying less weight).56 Overall, we would guess that Yellen’s views do not dominate the FOMC like Greenspan’s did, but we would nonetheless estimate that they carry substantially disproportionate weight.

FOMC decision-making dynamics

According to the transcripts of FOMC meetings and anecdotal reports, FOMC members do not typically register a formal dissent even when they would prefer a different policy than the chair or the majority.57

However, records of officially registered dissents are publicly available soon after meetings and give a sense of the dynamics of disagreement between FOMC members. Basic descriptive statistics on dissents are easy to capture:

  • In the last 20 years, Governors have only dissented from FOMC decisions a total of four times, while regional bank presidents have dissented far more frequently.58
  • Regional bank presidents tend to be more likely to dissent in favor of tighter policy, while Governors are more likely to dissent in favor of looser policy (though, as noted above, Governors very rarely dissent).59
  • In the last 20 years, there have never been more than two dissents at a single FOMC meeting, except at the August and September 2011 and December 2014 meetings (which each had three).60
  • Over the period 1978-2000, FOMC members, including both Governors and regional bank presidents, were more likely to dissent in favor of loose policy if the region they were from had above-average unemployment, and more likely to dissent in favor of tight policy if their regional had below-average unemployment (though the effect size is fairly small).61

Although legally speaking, a majority of the FOMC is sufficient to make decisions about monetary policy, in practice the committee does not appear to operate by majority rule (as the greater weight vested in the Chair attests). Evidence from transcripts of meetings during the chairmanship of Arthur Burns suggests that when members other than the chair make a difference, the distribution of influence seems to be somewhere in between a median voter (i.e. majority rules) and mean voter (i.e. average of what each member would like) model.62 Transcripts from the Greenspan era show that the FOMC followed his wishes, which suggests that it was driven more by the median voter than the average voter.63 An econometric model of rate-setting under the Burns and Greenspan FOMC finds that a consensus decision procedure best explains the observed patterns in the time series of interest rates (but doesn’t make use of minutes or dissent data).64 This makes it somewhat difficult to make firm predictions for the impact of changing the views or votes of individual members on overall committee decisions.

From the reports we’ve seen, regional bank presidents who do not have a vote at a given meeting appear not to have historically influenced the monetary policy outcomes of those meetings.65

With 10 voting members of the FOMC, as there are today, we would guess that the bulk of policy-making authority would fall on Chair Yellen, with the secondary authority falling to the second through fourth potential dissenters (presumably regional bank presidents).66

Interestingly, under the Greenspan chairmanship, Yellen, who was then a Governor and is now Chair, argued in favor of tightening in order to limit the risk of inflation, but did not dissent from Greenspan’s recommendation not to raise rates.67 Reflecting on that decision, Chappell et al. 2004 write:

While the arguments of Meyer and Yellen demonstrate a concern for inflation, they also illustrate another phenomenon. Despite an acknowledged risk of inflation, these members were willing to risk higher inflation to sustain the prevailing expansion. Even Greenspan recognized that this was implicit in his recommendation: ‘Having said all that, I fully acknowledge that we have a very tight labor market situation at this stage. I think identifying the current situation as an inflationary zone, as some have argued, is a proper judgment at this point. But it is a zone, not a breakthrough, and I would therefore conclude and hope, as I did last time, that we can stay at [policy alternative] ‘B,’ no change’ (Transcripts, September 24, 1996, 31). In hindsight, Greenspan’s recommendation seems to have been the correct one. When Burns era policymakers had chosen to take similar risks, however, the outcomes had been less favorable.

Outside influences on the FOMC

The Fed guards its independence scrupulously, and political considerations are virtually never raised at FOMC meetings.68 However, the Fed is subject to outside attention and pressure.69

There is a substantial empirical and theoretical literature on “political business cycles,” in which the central bank might keep interest rates artificially low in the period prior to an election to increase the probability of re-election for the incumbent party.70 There is relatively limited econometric evidence in support of the idea, and it suggests that to the extent this has been an issue in the United States, it ceased to be one by the 1980s.71 More anecdotal accounts suggest that the Fed may have behaved politically in this way during the Arthur Burns chairmanship, but generally not since then.72

The most notable example we are aware of in which the Fed explicitly acted in response to political concerns in the post-Burns era was the shift to targeting monetary aggregates rather than interest rates during the Volcker era.73 In order to reduce inflation, the Fed needed to raise interest rates to unusually high levels. To get some of the more dovish members of the FOMC on board with raising rates and to deflect public criticism from the Fed, Volcker decided to start officially targeting monetary aggregates instead of the interest rates themselves.74 This was a strategy that Minneapolis Fed president MacLaury called for explicitly as political cover in prior FOMC meetings.75 There is some nuance to this example: it is not clear to us whether the move was driven more by the need to get the more dovish FOMC members to go along with raising rates or the need to deflect public criticism, though to the extent that the doves were worried about public criticism, which seems to have been the case, the two would overlap.

During the same period, a variety of interest groups protested against the Fed’s high interest rates (e.g. by mailing keys to represent unbuilt homes), with no apparent impact on Fed policy.76

Today, the financial industry probably dedicates the most organized attention to the actions of the FOMC, but there is little evidence of explicit lobbying on monetary policy issues, and the Federal Advisory Council (a group of bank representatives that advise the Fed) does not appear very influential.77 However, FOMC members, especially but not only regional bank presidents, likely interact much more with the financial industry formally and informally than they do with other sectors of society (e.g. the unemployed).78 According to her calendar, which was recently obtained by the Wall Street Journal under an open records request, Yellen has spent notably little time with bank executives since becoming chair in early 2014.79

This campaign

Based on the above summary of historical evidence, we think any outside efforts to influence U.S. monetary policy, including this one, are relatively unlikely to succeed. However, we think it has a non-trivial chance and that in this case the small chance of an important impact is sufficient to justify the investment.

In our view, the Dallas and Philadelphia Fed presidents retiring in early 2015, combined with the fact that all of the regional Fed presidents are up for renewal or replacement in January 2016, may give the campaign an unusual potential for influence.80 We see the most likely outcome of this campaign being an increase in the transparency with which regional Fed presidents are selected, with little or no impact on personnel decisions, but we can also envision scenarios in which the campaign results in somewhat different regional Fed personnel outcomes in 2016.

In terms of short-term monetary policy decisions, any impact seems relatively unlikely, but we could imagine the campaign making FOMC members marginally less likely to prefer hawkishness policies (or to threaten to dissent in favor of them) or marginally more likely to take a dovish stance relative to the center of the committee.

Rationale for the grant

The cause

We are considering macroeconomic policy as a potential focus area, and accordingly have prioritized it for possible “learning grants”. As part of our search for potential grant opportunities, we made an initial grant to CPD to help this campaign get started.

As we wrote in our initial writeup, many people we have spoken with have pointed to the lack of advocacy around the FOMC from those concerned about unemployment, and we have taken that argument as evidence that macroeconomic policy (in particular, advocacy regarding macroeconomic policy) may be neglected as a philanthropic cause relative to its importance.

Case for this grant

We see the case for this grant as being based on three potential impacts:

  1. A slim probability of moving monetary policy in a marginally more dovish (i.e. lower unemployment, higher inflation) direction. Based on the arguments above, we think this would be importantly positive from a humanitarian perspective.
  2. A reasonable chance of achieving some of the campaign’s procedural goals, including raising the level of transparency around how regional Fed presidents and board member are selected.
  3. Enabling CPD to experiment with an advocacy campaign in this area, potentially laying the groundwork for future advocacy efforts in the area, and testing our hypothesis that advocacy around macroeconomic policy is a promising and relatively neglected philanthropic area.

In deciding to make this grant, we’ve put the most weight on the first consideration.

Our best guess, based on the history of outside efforts to influence the federal reserve and the specifics of this campaign, is that the campaign will probably have no impact on monetary policy, but that it has a slim chance of making a very large impact, which justifies the investment.

The history of the Federal Reserve over the last few decades points to a few decisions as having been particularly influential (e.g. Volcker’s decision to target monetary aggregates, Greenspan’s decision to keep the unemployment rate below the then-estimated NAIRU during the late 1990s). The humanitarian impact of these decisions is difficult to calculate, but likely very large. Even a small chance (e.g. below 0.1%) of causing such an important change could have a high expected value.

We haven’t conducted a formal cost-effectiveness analysis for this grant, but we think it is likely to be competitive with other policy advocacy grants we’ve considered.

Room for more funding and fungibility

We think this campaign would be unlikely to occur at anything resembling the planned scale without our support. CPD has limited unrestricted funding,81 and is not aware of any other sources of funding that would consider funding the majority of the campaign.82

The initial budget we saw projected expenses of around $1.5 million, and we decided to contribute roughly half that amount. We tried to settle on an amount that would still require CPD to seek funding from other sources but would be sufficient to enable some level of campaigning to take place even if they failed to do so. We take the fact that the budget was revised downward after our commitment to support the notion that CPD wouldn’t be able to find the amount of funding that we’ve contributed from other sources, and that accordingly our contribution is largely non-fungible.

Risks to the success of the grant

We think this grant could fail in two broad ways:

  1. It could fail to achieve any policy impact.
  2. It could unintentionally cause harm by subjecting the Fed to more populist pressure, by causing a more powerful counter-mobilization, or by succeeding in pushing policy in the desired direction but turning out to be wrong about what direction would be desirable.

As discussed above, we think the first and more prosaic failure mode is more likely than not to occur: the campaign is unlikely to have a policy impact because the Fed is a relatively insulated, technocratic body. However, we could nonetheless still be overoptimistic in believing the campaign has a non-negligible chance of having an impact, especially since we do not have a fully detailed understanding of the mechanisms through which the campaign aims to do so.

We also see this grant as carrying a limited but non-negligible risk of causing harm:

  • A left-leaning campaign around monetary policy issues could conceivably risk destabilizing a technocratic consensus in support of the Fed.83 However, we doubt the existence of such a consensus: the Wall Street Journal and the New York Times editorialize in opposite directions on Fed decisions,84 the Cato Institute recently launched a new center on monetary policy aiming to “challenge [the Fed’s] credibility,”85 and members of Congress regularly call for audits of the Fed’s decision-making.86 Most economists strongly support the premise of central bank independence and oppose Congressional efforts to impose tighter restrictions on that independence,87 but we see this campaign as falling substantially closer to newspaper editorializing than to Congressional action to limit the Fed’s authority.
  • Separate from general concerns about destabilizing a hypothetical technocratic consensus around the Fed, stronger mobilization by those who would prefer looser monetary policy could prompt a more powerful counter-mobilization by those who would prefer tighter monetary policy. To some extent this has already occurred, as described above, with a Wall Street Journal editorial and press conference by a conservative group in response to the campaign’s meeting with Yellen in November.88 However, to our knowledge, those responses received much less press attention than the initial campaign actions, and we would generally expect that pattern to continue. We do regard this as a substantial risk to the project.
  • Perhaps most importantly, we could be wrong about the appropriate stance of monetary policy, in a number of ways:
    • Inflation could be more likely to take off, or have worse humanitarian impacts, than we’ve been able to detect.
    • Keeping interest rates low could promote financial instability or accelerate the onset of the next recession, either through increased instability or by causing a later, more extreme tightening. Former Federal Reserve Governor Jeremy Stein has been a prominent advocate for the view that monetary policy should take financial stability concerns into account and, likely, tighten faster than inflation and output would suggest,89 but our impression is that most of the other people who have considered the issue have concluded that current monetary policy is not particularly risky and that it is more appropriate to ensure financial stability using “macroprudential” tools.90 Dallas Fed President Richard Fisher has emphasized the risk of recession due to needing to tighten more extremely at a later date.91 We think neither of these risks are dispositive.
    • Monetary policy could be structurally less powerful in influencing unemployment and other humanitarian outcomes than we’ve assumed it is.

    There is fairly widespread disagreement about these issues amongst economists, so it is not difficult to believe we could be mistaken. However, we see broader discussion and debate around these issues as genuinely useful, and likely to produce better monetary policy, even if we are mistaken. We expect that the campaign is more likely to succeed if it is directionally correct, so even in the context of uncertainty about whether we have correctly weighed these risks, increasing advocacy on one side is more likely to be beneficial than harmful.

Additionally, while we’ve tended to regard the campaign’s goals around accountability and transparency in the process of selecting regional Fed presidents as an unmitigated good, they could be a problem if people with opposing views about monetary policy were more likely to effectively exploit the new openness (which might be the case),92 or for unanticipated reasons.

Plans for learning and follow-up

Key questions for follow-up

Questions we hope to eventually try to answer include:

  1. What activities does the campaign undertake?
  2. What sort of attention does the campaign receive from policymakers or the press? We expect to largely rely on CPD’s press tracking to answer this question. We may check the transcripts of 2015 FOMC meetings after they are released in 2021 to see whether any of the FOMC members discuss meetings with workers that inform their perspectives on policy.
  3. To what extent does the campaign appear to influence monetary policy or the process of selecting regional bank board members and presidents? We think it is unlikely that the campaign will have an influence on monetary policy, or that we would be able to find out if it did, but nonetheless the possibility that it will plays a central role in our decision to make this grant, and we intend to at least ask the question. We are more optimistic that the campaign might influence the (transparency of the) process of selecting regional bank board members and presidents, and we also anticipate being more likely to be able to attribute changes to the campaign (since few other actors are mobilized on the topic).
  4. What do we learn from CPD and their approach to running a campaign like this? This is a relatively novel kind of philanthropy for us, and we expect that we will learn something about how to assess campaign funding opportunities in the future.

Follow-up expectations

We expect to have a conversation with campaign staff every 2-3 months for the duration of the grant, with public notes if the conversation warrants it.

Towards the end of the duration of the grant, we plan to attempt a more holistic and detailed evaluation of the grant’s performance, aiming to answer the questions above. As mentioned above, we may check the transcripts of 2015 FOMC meetings after they are released in 2021 to see whether any of the FOMC members discuss meetings with workers that inform their perspectives on policy.

We may abandon either or both of these follow-up expectations if macroeconomic policy ceases to be a focus area, or perform more follow-up than planned if this work becomes a more central part of our priorities.

Our process

CPD approached us for support for the campaign after hearing about our interest in potentially funding advocacy in this space. We made a previous grant of $100,000 to CPD to help get the campaign started.

Prior to deciding about this grant, we had a number of further conversations with Ady Barkan of CPD about the campaign’s plans, followed the initial progress of the campaign in drawing press attention, and looked more deeply into research on monetary policy.

We shared a draft version of this page with CPD staff prior to the grant being finalized.

Process for forming and vetting views on monetary policy

We became interested in macroeconomic policy as a potential focus area because of the attention it has drawn in the press and blogosphere since the beginning of the Great Recession. Many of our initial impressions about the topic were formed by reading blogs by economists such as Paul Krugman, Brad DeLong, Tim Duy, Scott Sumner, and Tyler Cowen (though this is not to suggest that these individuals agree with each other or with us).

In trying to form more confident views and to understand the perspective of the people who disagree with us, we pursued a number of avenues:

  • Reviewing more of the academic literature on specific questions of interest (such as the welfare costs of inflation), typically by searching in Google Scholar and following citation networks. Because of the complexity of many macroeconomic models and the large size of this literature, we didn’t find this especially informative or conclusive, but we review what we found above. We didn’t do this at the level of detail that we do in some of our other work.
  • Reading blog posts, op-eds, and speeches by prominent economists with more hawkish views.93
  • Off the record conversations with a prominent conservative monetary economist and two former senior Fed officials.

Sources

Document Source
Appointment of Reserve Bank Presidents and First Vice Presidents Source (archive)
Associated Press 2014a Source (archive)
Associated Press 2014b Source (archive)
Atkinson, Luttrell, and Rosenblum 2013 Source (archive)
Ball 2013 Source (archive)
Bernstein 2014 Source
Bernstein and Baker 2013 Source (archive)
Blanchflower and Posen 2014 Source (archive)
Blanchflower et al. 2014 Source (archive)
Blinder 2007 Source (archive)
Bloomberg News 2014a Source (archive)
Bloomberg News 2014b Source (archive)
Bloomberg News 2014c Source (archive)
Bloomberg News 2014d Source (archive)
Chappell et al. 2004 Source (archive)
Chodorow-Reich 2014 Source (archive)
Clarida 2014 Source (archive)
Coyne 2005 Source (archive)
CPD Fed Open Letter Source (archive)
CPD Federal Reserve Campaign Budget Unpublished
CPD Federal Reserve Campaign Paper Source
CPD Memo on the Alleged Insulation of the Federal Reserve from Political Pressure Source
CPD - Our Meeting With Janet Yellen Unpublished
Crump et al. 2014 Source (archive)
DeLong 2014 Source (archive)
Di Tella and MacCulloch 2007 Source (archive)
Di Tella, MacCulloch, and Oswald 2001 Source (archive)
Directors of Federal Reserve Banks and Branches Source (archive)
Drazen 2001 Source (archive)
Duy 2014 Source (archive)
Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, December 2014 Source (archive)
Economist 2014a Source (archive)
Economist 2014b Source (archive)
Economist 2014c Source (archive)
EPI State of Working America 2012 Source (archive)
Evans 2014 Source (archive)
Fed Up 2015 Budget Unpublished
Fed Up 2015 Budget Draft for GiveWell Unpublished
Fed Up Campaign Plan Unpublished
Fed Up Coalition Priorities Source (archive)
Fed Up One Pager Source (archive)
Federal Reserve Bank Presidents Source (archive)
Feldstein 1997 Source (archive)
Fernald 2014 Source (archive)
Financial Times 2014 Source
Fisher 2014 Source (archive)
Mishkin 2008 Source (archive)
FOMC Projections, June 2014 Source (archive)
FOMC Transcript March 2008 Source (archive)
FRED chart of five year and five year forward inflation expectations Source (archive)
Gerlach-Kristen and Meade 2011 Source (archive)
GiveWell’s non-verbatim summary of a conversation with Brian Kettering on October 16, 2014 Source
Goldman Sachs Global Investment Research, July 25, 2014 - FOMC Preview: Eyes on the Dashboard Unpublished
Goldman Sachs Research US Daily: Q&A on “Why Renege Now?” (Hatzius) 9-15-2014 Unpublished
Greider 1987 Source (archive)
Helliwell and Huang 2014 Source (archive)
Hilsenrath 2014 Source (archive)
How is a Federal Reserve Bank president selected? Source (archive)
IGM Survey on Congress and Monetary Policy Source (archive)
IMF 2013 Source (archive)
Ireland 2009 Source (archive)
Katz and Krueger 1999 Source (archive)
Kiley 2014 Source (archive)
Kocherlakota 2014 Source (archive)
Krugman 2014 Source
Lucas 2000 Source
Meade 2005 Source (archive)
Meade and Sheets 2005 Source (archive)
Meltzer 2010 Source (archive)
Meyer 2004 Source (archive)
Washington Post 2014a Source
Notes from a conversation with Joe Gagnon on February 4, 2014 Source
Notes from a conversation with Josh Bivens on February 6, 2014 Source
Notes from a conversation with Laurence Ball on April 17, 2014 Source
Notes from a conversation with Mike Konczal on January 23, 2014 Source
New York Times 2014a Source
New York Times 2014b Source
New York Times 2014c Source
New York Times 2014d Source
New York Times 2014e Source
New York Times 2014f Source
New York Times 2014g Source
New York Times 2015 Source
PBS 2014 Source (archive)
Plosser 2014 Source (archive)
Reuters Fed Dove-Hawk Scale Source (archive)
Reuters 2014 Source (archive)
Riboni and Ruge-Murcia 2010 Source (archive)
Schonhardt-Bailey 2014 Source (archive)
Stein 2014 Source (archive)
Sumner 2014 Source (archive)
Survey of Professional Forecasters Fourth Quarter 2014 Source (archive)
The Hill 2014 Source (archive)
The Structure of the Federal Reserve System Board of Directors Source (archive)
Thornton and Wheelock 2014 Source (archive)
Washington Post 2014b Source
Washington Post 2014c Source
WSJ 2014a Source (archive)
WSJ 2014b Source (archive)
WSJ 2014c Source (archive)
WSJ 2014d Source (archive)
WSJ 2014e Source (archive)
WSJ 2015 Source (archive)
Weisenthal 2014 Source (archive)
Wolfers 2003 Source (archive)
Woodford 2001 Source (archive)
Woodford 2012 Source (archive)
Woolley 1984 Source (archive)
Wynne 2013 Source (archive)
Yellen 2014 Source (archive)
Yellen and Akerlof 2004 Source (archive)
  • 1. “Fed Up is powered by: Center for Popular Democracy, AFL-CIO, Action for the Common Good, Action United (PA), Alliance of Californians for Community Empowerment, Campaign for America’s Future, Center for Community Change, Communities Creating Opportunity (MO), Demos, Economic Policy Institute, Kansas People’s Action, Make the Road New York, Missourians Organized for Reform and Empowerment, Neighborhoods Organizing for Change (MN), New York Communities for Change, OurDC, Pennsylvania Working Families, Texas Organizing Project, and the Working Families Organization.” Fed Up One Pager
  • 2.

    Fed Up One Pager:
    “Create a Strong & Fair Economy

    • Good Jobs for All: The Federal Reserve should commit to building a full employment economy. It should keep interest rates low so that wages can rise significantly and everybody can find a good job.
    • Investment in the Real Economy: The Fed should use its existing legal authority to provide low- and zero-interest loans so that cities and states can invest in public works projects like renewable energy generation, public transit, and affordable housing that will create good new jobs.
    • Research for the Public Good: The Fed should study the harmful effects of inequality and examine how policies like raising the minimum wage and guaranteeing a fair workweek can strengthen the economy and expand the middle class.

    Create a More Transparent & Democratic Federal Reserve

    • Ensure That Working Families’ Voices Are Heard: Fed officials should regularly meet with working families and community leaders, not just business executives, in order to get a more accurate picture of how the economy is working.
    • Fed Officials Should Actually Represent the Public: In regional banks around the country, Fed leaders come overwhelmingly from financial institutions and major corporations. The Fed should appoint genuine representatives of the public interest to these governance positions.
    • Create a Legitimate Process for Selecting Fed Presidents: In late 2015 and early 2016, the regional Fed banks will select their next presidents, who will serve five year terms. Currently, the process for selecting those presidents is completely opaque and involves no public input. That needs to change, so that the public has a real role in the selection process.”
  • 3.

    Fed Up 2015 Budget

  • 4.

    Fed Up 2015 Budget Draft for GiveWell

  • 5.

    Fed Up 2015 Budget

  • 6.

    Fed Up Campaign Plan

  • 7.

    GiveWell’s non-verbatim summary of a conversation with Brian Kettering on October 16, 2014: “The Center for Popular Democracy (CPD) merged with the Leadership Center for the Common Good on January 1, 2014, and the combined 501(c)3 organization kept the CPD name. Mr. Kettenring, who has worked in community organizing for over 20 years, founded Common Good in 2010 to provide training and support for community organizations. Its work was similar to, but at a smaller scale than, CPD’s current work.

    Common Good’s 2013 budget prior to the merger with CPD was about $3 million, and it had 13 staff. CPD also had a budget of about $3 million before the merger, and it had 22 staff. CPD’s 2014 post-merger budget is about $8 million, and it has an affiliated 501(c)4 organization (Action for the Common Good) with an annual budget of about $2 million. It has grown substantially since the merger and employs about 50 staff. ”

  • 8.

    GiveWell’s non-verbatim summary of a conversation with Brian Kettering on October 16, 2014: “The Center for Popular Democracy (CPD) merged with the Leadership Center for the Common Good on January 1, 2014, and the combined 501(c)3 organization kept the CPD name. Mr. Kettenring, who has worked in community organizing for over 20 years, founded Common Good in 2010 to provide training and support for community organizations. Its work was similar to, but at a smaller scale than, CPD’s current work.

    Common Good’s 2013 budget prior to the merger with CPD was about $3 million, and it had 13 staff. CPD also had a budget of about $3 million before the merger, and it had 22 staff. CPD’s 2014 post-merger budget is about $8 million, and it has an affiliated 501(c)4 organization (Action for the Common Good) with an annual budget of about $2 million. It has grown substantially since the merger and employs about 50 staff. ”

  • 9.

    CPD Federal Reserve Campaign Paper “The Center for Popular Democracy is a high-impact national organization that promotes equity, opportunity, and a dynamic democracy in partnership with innovative base-building organizations, organizing networks and alliances, and progressive unions across the country. CPD builds the strength and capacity of democratic organizations to envision and advance a pro-worker, pro-immigrant, racial and economic justice agenda.
    Collectively, our staff of more than 40 brings decades of experience to bear, merging technical and legal expertise with deep organizing experience to support our partners in winning, sustaining, expanding and replicating victories across the country. CPD not only helps partners win organizing campaigns and further innovative policy agendas, but we also support them to build strong organizational infrastructure and political muscle.
    The Center for Popular Democracy will be joined in this campaign by core partners interested in Federal Reserve bank cities across the country, each of which have broad memberships bases, deep political relationships, and alliances with labor and community groups across their cities.”

  • 10.

    GiveWell’s non-verbatim summary of a conversation with Brian Kettering on October 16, 2014: “CPD’s budget includes roughly $2 million dollars in unrestricted funds. The rest of its funding is limited to specific issues. CPD would prefer to have more unrestricted funds, so it could undertake more experimentation without having to solicit specific funding. Its general-use funding currently supports core operations. Though most funding for community organizing is currently restricted to specific issues, CPD hopes some of its biggest funders will choose to provide general support within a year. CPD would like to raise more general-use funding.

    CPD’s three biggest funders are:

    • Wyss Foundation
    • Ford Foundation
    • Open Society Foundations

    Together, these funders account for just over half of CPD’s budget.

    Other major funders include: the Marguerite Casey Foundation, the Rockefeller Family Fund, the Surdna Foundation, and the Unitarian Universalist Veatch Program at Shelter Rock.”

  • 11.

    GiveWell’s non-verbatim summary of a conversation with Brian Kettering on October 16, 2014: “Prior to the merger with CPD, Mr. Kettenring ran a national coalition called “Campaign for a Fair Settlement” that focused on promoting non-Congressional action to help struggling homeowners and align Wall Street incentives with economic security. From November 2011, to May 2013, the campaign pressured the White House and the Department of Justice to act, leading to a roughly $13 billion Chase settlement, with $4 billion in relief for homeowners. Several settlements have brought billions of dollars to homeowners.”

  • 12.
    • Washington Post 2014a: “The Center for Popular Democracy is slated to release a letter Tuesday signed by more than 60 left-leaning organizations, ranging from community groups to bigger players such as the Economic Policy Institute, Public Citizen and Demos. They are calling on the Fed to keep its easy-money policies in place until wages start to rise and what has been an exceptionally uneven recovery begins to broaden out. Butler, along with several other workers and activists, intend to trek through the mountains to deliver that message in person before the conference begins Thursday.”
    • CPD Fed Open Letter
  • 13.
  • 14.

    New York Times 2014e

  • 15.

    New York Times 2014d: “A coalition of community groups and labor unions wants the Federal Reserve to change the way some Fed officials are appointed, criticizing the existing process as secretive, undemocratic and dominated by banks and other large corporations.
    In letters sent to Fed officials last week, the coalition called for the central bank to let the public participate in choosing new presidents for the regional reserve banks in Philadelphia and Dallas. The current heads of both banks plan to step down in the first half of 2015.
    The Fed’s chairwoman, Janet L. Yellen, has agreed to meet on Friday with about three dozen representatives of the groups to hear their concerns.”

  • 16.
  • 17.
    • CPD - Our Meeting With Janet Yellen: “Amazingly, our campaign is already yielding real results: On Thursday, for the first time, Dallas Fed President Richard Fisher announced the precise date of his retirement – something that we had specifically called on him to do in our open letters in the New York Times three days earlier. And, on Friday, the Philadelphia Fed released the name of the search firm it was using to conduct the search for President Plosser’s replacement – again, in response to our specific critique in Monday’s letter – and set up an email address to receive comments from the public about the process.”
    • Bloomberg News 2014c: “The Philadelphia Fed has hired executive search firm Korn/Ferry International and said yesterday that the Los Angeles-based company has set up an e-mail address –PhiladelphiaFedPresident@KornFerry.com– to receive inquiries.
      The Dallas Fed announced two days ago that it hired Heidrick & Struggles International Inc. to seek a replacement for Fisher.”
    • WSJ 2014a: “The Philadelphia Fed announced Friday that Korn Ferry, the executive search firm hired to conduct the search for a new president, established an email address “to receive inquiries.” Asked if the move was in response to the protests, a spokesperson said it was “one part of our broad search process.””
  • 18.
    • How is a Federal Reserve Bank president selected?: “Last update: December 10, 2014.”
    • WSJ 2015: “The Federal Reserve is forming a new advisory group comprised of consumer advocates and community representatives to “provide information, advice and recommendations” to the Fed’s board on a wide range of issues, the central bank said Friday.
      The creation of the Fed’s Community Advisory Council, which will meet twice a year starting in the fourth quarter of 2015, is the latest step in Fed Chairwoman Janet Yellen’s push to make the fortress-like institution more accessible to the public.
      Ms. Yellen has spoken to community groups and met with local leaders and workersto get their input on the state of the economy and the job market.
      The advisory group will meet with the Fed’s board of governors in Washington “to offer diverse perspectives on the economic circumstances and financial services needs of consumers and communities, with a particular focus on the concerns of low- and moderate-income communities,” the Fed said in a statement.
      The Fed said it would soon provide more information about the nomination process for the new community advisory group.”
  • 19.
  • 20.
    • The Hill 2014: “The resurgence of left-leaning interest in the Fed’s operations further complicates the bank’s efforts to remain above the political fray. The Fed has weathered years of criticism from the right, which argues its unprecedented foray into monetary stimulus after the recession was a recipe for disaster.
      But now, with the Fed preparing to finally dial back years’ worth of quantitative easing, it’s the other side that is airing concerns. This time, the worry is that the Fed could tighten policy too quickly, even as millions of Americans still are looking for work or grappling with stagnant paychecks.
      “I have been concerned for some time that when the Federal Reserve began to tighten policy that they would be subject to considerable pressure from people who don’t want them to do that,” said Donald Kohn, a former Fed vice chairman now with the Brookings Institution.”
    • PBS 2014: “Even if their message resonates, though, the Fed, and Yellen as its public face, does not necessarily have authority to address every plight of working Americans. Yellen has herself said many times that wages are still too low in this recovery. “If they’re trying to elicit sympathy that wage earners aren’t making enough,” Blinder said about Fed Up, “they’re preaching to the converted.”

      The central bank has no control over wages, except in the sense that wages typically rise in a tighter labor market, said Blinder. Holding short-term interest rates low is supposed to boost employment, and it has — unemployment has dropped from above 10 percent to below 6 percent — but so far, that’s done little for wages.”

    • Financial Times reporter Robin Harding noted that there would be a conservative response and said, “I can’t fathom what anybody expects to gain.”
  • 21.

    Fed Up One Pager

  • 22.

    Ball 2013: “Economists have pointed out many adverse effects of inflation. Mishkin (2011) gives a typical list: distortions in cash holdings; overinvestment in the financial sector; greater uncertainty about relative prices and the aggregate price level; distortions of the tax system; redistributions of wealth; and difficulties in financial planning.
    But how large are these effects? An empirical literature, motivated largely by the experience of the 1970s, has tried to measure some of the costs of inflation. Papers such as Fischer (1981), for example, examine inefficiencies arising from relative-price variability. This research has not produced a compelling case that inflation is harmful. As Krugman (1997) remarks, “one of the dirty little secrets of economic analysis is that even though inflation is universally regarded as a terrible scourge, efforts to measure its costs come up with embarrassingly small numbers.”
    Krugman is talking about research on the double-digit inflation of the 1970s. Since it is difficult to identify costs of inflation at that level, few empirical studies have even tried to find costs of single-digit inflation.
    A number of cross-country studies ask whether inflation affects economic growth. A common finding is that inflation rates above some threshold reduce growth, but lower levels of inflation are neutral. Estimates of the threshold vary considerably, from 8% (Sarel, 1995) to 40% (Bruno and Easterly, 1996), but 4% is clearly below the threshold.”

  • 23.

    E.g.,:

    • Lucas 2000 reports: “In all of the models I have reviewed, the estimated gains of reducing inflation and interest rates are positive, starting from any interest rate above, say, one tenth of one percent. Even when fiscal considerations make a strictly positive interest rate optimal, the necessary qualification to the Friedman (1969) rule is quantitatively trivial. According to Figure 5 (or 6) reducing interest rates from 14 percent to 3 percent would yield a benefit equivalent to an increase in real income of about 0.008, eight tenths of one percent. This estimate is about the same whether one uses the fitted log-log demand curve for money or the semi-log version. It is based on observations that contain a great deal of information on behavior over this entire range of interest rates. I have argued that this estimate is not at all sensitive to assumptions about the fiscal policy used to effect the interest rate reduction, and that adding realistic productivity or money supply shocks to the model of Section 3 or to that of Section 5 will not alter the estimated welfare cost by much. I regard all of these conclusions as solidly, though of course not conclusively, established.
      A 3 percent interest rate is about the rate that would arise in the U.S. economy under a policy of zero inflation. The optimal monetary policy, within the class of theories discussed in this paper, entails a deflation consistent with interest rates at or near zero. Based on the theory and evidence I have reviewed, the estimated welfare gain of a reduction in interest rates to near zero levels can vary considerably, depending on the specific model one uses. According to the estimates based on a log-log demand curve, as reported in Figure 5, the welfare gain from a monetary policy that reduces interest rates from 3 percent to zero, measured as a fraction of real GDP, is about 0.009, which is to say slightly larger than the gain from reducing rates from 14 to 3 percent! Using the semi-log estimates, however, the estimated gain from reducing interest rates from 3 percent to zero is less than 0.001. Insofar as the fixed costs postulated by Mulligan and Sala-i-Martin are important, even this figure may be an overstatement.” If reducing inflation by 11 percentage points “would yield a benefit equivalent to an increase in real income of about 0.008, eight tenths of one percent,” then the benefit from reducing inflation by one point would be 0.008/11 = 0.00073 (at roughly zero inflation; depending on the model the marginal gains to reducing inflation to optimal deflationary levels could be higher).
    • Ireland 2009: “Assuming, as before, that the steady-state real interest rate equals 3 percent, so that r = 0.03 corresponds to zero inflation, r = 0.05 corresponds to 2 percent annual inflation, and r = 0.13 corresponds to 10 percent annual inflation, the regression coefficients put the welfare cost of pursuing a policy of price stability as opposed to the Friedman (1969) rule at less than 0.015 percent of income, the cost of 2 percent inflation at less than 0.04 percent of income, and the cost of 10 percent inflation at less than 0.25 percent of income. These welfare cost estimates lie far below those computed by Lucas (2000) and bring the analysis full circle, back to Figures 1 and 2 and the apparent steepening and leftward shift of the money demand function in the years since 1980. Interestingly, these figures also provide estimates of the cost of 10 percent inflation compared to price stability, w (0.13)- w (0.03), that lie between 0.20 and 0.22 percent of income, numbers that are still smaller than, but resemble more closely, Stanley Fischer’s (1981) estimate of 0.30 percent of income and Lucas’s (1981) estimate of 0.45 percent of income.”
  • 24.

    Feldstein 1997 considers a wider range of costs, including interactions with the tax code, and concludes that: “With the parameter values that seem most likely, the overall total effect of reducing inflation from 2% to zero, shown in the lower right corner of the table, is to reduce the annual deadweight loss by between 0.63 and 1.01% of GDP.” This model relies on a number of fairly strong assumptions about the behavioral responses to marginally higher inflation rates, which we think are relatively unlikely to occur in practice.

  • 25.
    • Woodford 2001:
      • “However, under a plausible calibration of the degree of market power in an economy like the U.S., the relative weight on the output gap in this index should only be about 0.1 — much smaller than the weights assumed, for example, by Hall.”
      • “As is discussed further in Woodford (1999c), the estimate of the slope of the short-run aggregate supply curve for the U.S. of Rotemberg and Woodford (1997) implies a value for ?x on the order of .05, if the output gap is measured in percentage points and inflation is measured as an annualized percentage rate. This value is much lower than the value ?x = 1 often assumed in the literature on evaluation of monetary policy rules, on a ground such as “giving equal weight to inflation and output” as stabilization objectives.20 Our utility-based analysis implies instead that if one assumes the degree of price stickiness that is needed to account for the persistence of the real effects of monetary policy shocks, the distortions associated with inflation are more important than those associated with variation in the aggregate output gap.”
    • Di Tella and MacCulloch 2007: “The efforts to derive high costs of inflation are more successful in the approach followed by Rotemberg and Woodford (1997), who focus on the second channel. They develop a model where structural relations are grounded in optimizing individual behavior and where firms must occasionally keep their prices fixed, resulting in substantial relative price distortions when inflation increases. As discussed in Woodford (1999), their estimates for the United States imply a value for the costs of inflation relative to unemployment of the order of 20, if the output gap is measured in percentage points and inflation is measured at an annualized percentage rate. That is, the weight on inflation is 20 times the weight on the output gap in society’s welfare.”
    • Blanchflower et al. 2014: “Interpretations of the welfare costs of inflation focus on the real resource costs associated with asynchronous price changes or the reallocation of resources to government associated with increases in the money supply (inflation) and the resulting “inflation tax” - see Bailey (1956), Friedman (1971) and Lucas (2000). Models of the costs of inflation associated with asynchronous pricing models include Lucas (1973), Barro (1976), Benabou and Gertner (1993) and Rotemberg and Woodford (1998). For example, using structural VARs, Rotemberg and Woodford assess the relative costs of inflation and unemployment (incomplete stabilization) in a model where prices changes are staggered. The underlying welfare function ultimately depends on consumption and leisure. The welfare losses of inflation are indirect – they are due to the misallocation of resources associated with price instability, rather than due to a direct effect of inflation on utility. Using this analysis to calibrate a welfare loss function based on the price level and the output gap, Woodford (2001) suggests that “the relative weight on the output gap measure should only be about 0.1” (p.47), implicitly concluding that the welfare gains from price stability are significantly greater than those from stabilizing output and therefore unemployment.”
  • 26.
    • Ball 2013: “Some economists acknowledge that the zero bound is a significant problem with a two percent inflation target, but still reject the solution of four percent inflation. Instead, they advocate a different policy: a target for the price level (Eggertsson and Woodford, 2003; Coiboin et al., 2012). This policy produces low inflation on average, but inflation rises temporarily if a zero-bound episode has pushed the price level below its long run path. In this regime, if the nominal interest rate hits zero, then expected inflation rises, which reduces the real interest rate and boosts the economy out of a slump.
      As Woodford (2009) emphasizes, the success of this policy depends on whether it “can actually be made credible to the public, so that inflation expectations are affected in the desired way.” During a period of lower-than-average inflation, the central bank must convince people that higher inflation is coming. Will that work?”
    • Woodford 2012:
      • “Eggertsson and Woodford (2003) show that, in the context of their New Keynesian DSGE model, an optimal policy commitment can be expressed in terms of a com- mitment to maintain interest rates at their floor until a particular target is achieved. (After that, the bank should be expected to implement the kind of “flexible inflation targeting” regime characterized in studies of optimal monetary policy that abstract from the existence of a lower bound on interest rates.) The target specifies a path for an “output-gap adjusted” price level, (the log of) which is defined as the log of a general price index plus a positive multiple of the output gap; the coefficient multi- plying the output gap in the optimal target criterion depends on the relative weight on output-gap stabilization (as opposed to inflation stabilization) in the bank’s ob- jective. The policy rate should remain at its lower bound as long as even that degree of monetary stimulus results in a gap-adjusted price level below the target path. This means that even once financial conditions have normalized, so that it would be pos- sible for the central bank to achieve both its inflation target and a zero output gap from then onward (at a normal level of the policy rate), it might be necessary to keep interest rates low for somewhat longer, in order to raise the gap-adjusted price level to the target path.”
      • “Despite these conceptual advantages, one must admit that the notion of a target for a “gap-adjusted price level” would not easily be made to seem natural to a public not previously accustomed to discussion of economic policy in such terms. The fact that the “output-gap adjustment” would require reference to a debatable measure of potential output would further increase the possible grounds for suspicion and uncertainty about the policy’s implications. There might then be practical advantages to the formulation of one’s target criterion in terms more familiar to the public, and more easily verifiable, even at the expense of some departure from the theoretically optimal criterion under idealized assumptions about the public’s understanding.”
      • “An alternative that I believe should be equally easy to explain to the general public, but that would preserve more of the advantages of the adjusted price-level target path, would be a criterion based on a nominal GDP target path, as proposed by Hatsius and Stehn (2011), Romer (2011), and Sumner (2011) among others. Under this proposal, the FOMC would pledge to maintain the funds rate target at its lower bound as long as nominal GDP remains below a deterministic target path, represent- ing the path that the FOMC would have kept it on (or near) if the interest-rate lower bound had not constrained policy since late 2008. Once nominal GDP again reaches the level of this path, it will be appropriate to raise nominal interest rates, to the level necessary to maintain a steady growth rate of nominal GDP thereafter.
        Figure 13 shows the recent evolution of US nominal GDP, with a log-linear trend line fit to the data between 1990:Q1 and 2008:Q3 (i.e., the last quarter before the zero lower bound became a binding constraint).32 Nominal GDP is currently well below this trend line (15.6 percentage points below, as of 2012:Q2), and the gap continues to increase. Even if one regarded the average rate of nominal GDP growth over this period as too high to be consistent with a desirable inflation rate over a longer run, and had chosen instead to commit to a trend line with a moderately lower growth rate (say, only 4.5 percent per year), one would still conclude that nominal GDP today is more than 10 percentage points below a trend line extrapolated forward from 2008:Q3;33 such a commitment would accordingly require pursuit of nominal GDP growth well above the intended long-run trend rate for a few years in order to close this gap. At the same time, such a commitment would clearly bound the amount of excess nominal income growth that would be allowed, at a level consistent with the Fed’s announced long-runt target for inflation.
        In the theoretical analysis of Eggertsson and Woodford (2003), a simple nominal GDP target path would not achieve quite the full welfare gains associated with a credible commitment to the gap-adjusted price level target. (In particular, it is surely true — and not just in the special model of Eggertsson and Woodford — that if consensus could be reached about the path of potential output, it would be desirable in principle to adjust the target path for nominal GDP to account for variations over time in the growth of potential.) Nonetheless, such a proposal would retain several of the desirable characteristics of the gap-adjusted price level target that have been stressed above, and these may well be the most robustly desirable features of that proposal.
        Essentially, the nominal GDP target path represents a compromise between the aspiration to choose a target that would achieve an ideal equilibrium if correctly understood and the need to pick a target that can be widely understood and can be implemented in a way that allows for verification of the central bank’s pursuit of its alleged target, in the spirit of Milton Friedman’s celebrated proposal of a constant growth rate for a monetary aggregate. Indeed, it can be viewed as a modern version of Friedman’s “k-percent rule” proposal, in which the variable that Friedman actually cared about stabilizing (the growth rate of nominal income34) replaces the monetary aggregate that he proposed as a better proximate target, on the ground that the Fed had much more direct control over the money supply. On the one hand, the Fed’s ability to directly control broad monetary aggregates (the ones more directly related to nominal income in the way that Friedman assumed) can no longer be taken for granted, under current conditions; and on the other hand, modern methods of forecast targeting make a commitment to the pursuit of a target defined in terms of variables that are not under the short-run control of the central bank more credible. Under these circumstances, a case can be made that a nominal GDP target path would remain true to Friedman’s fundamental concerns.35”
  • 27.
    • Helliwell and Huang 2014 analyze subjective wellbeing data from surveys that cover 3.3 million Americans: “To evaluate the direct costs on the unemployed themselves, we first esti- mate the reduction in income associated with unemployment by regressing the log of household income on personal unemployment status, together with all the covariates in Tables 1 that include gender, age, education, race and others. In the BRFSS data, personal unemployment status has a coefficient of -0.36 in the income equation, indicating a 43% income difference between the unemployed and others with similar characteristics. In the Gallup-Healthways survey, the estimated difference is 0.34 in logs or 40%. These estimate are likely higher-end estimates of the income losses from unemployment, as there could be unobserved factors responsible for a lower level of income as well as a higher chance of being unemployed. This potential bias strengthens our later argument that monetary loss is a small part of the costs of unemployment. How does the lower income affect well-being? The log income’s per-unit effects on well-being are reported in Tables 1. For life satisfaction, the effect is 0.2. A 0.36 reduction in log income has a negative impact of 0.36*0.2=0.072. The well-being equation in Tables 1 also shows the coefficient on personal unemployment status. Those coefficients measure the nonpecuniary effect of personal unemployment, since the income variable is already controlled for. For life satisfaction, personal un- employment’s coefficient is -0.4. The ratio of nonpecuniary to pecuniary effects from personal unemployment is thus 0.4/0.072=5.6.10
      There is an extra pecuniary effect on other household members of the newly unemployed. A job loss reduces household income, and hence negatively affects all members of the household according to our model specification. The aver- age household size is 2.58 according to the 2010 Census Briefs. So there is a 1.58 times additional monetary effects on SWB through the within-household spillover effects.
      To evaluate the indirect cost at the population level, we use the estimated coefficients on local unemployment in Tables 1. In the life satisfaction equation, local unemployment has a coefficient of -0.59. The indirect cost of a one percentage point increase in unemployment is thus 0.59*1 percent. Since the US labor force participation rate is about 65 percent, a 1 percent increase in the unemployment rate moves 0.65 percent of the population from the employment pool to the unemployment pool. The direct well-being loss due to monetary losses, as calculated before, is 0.072 individually and thus 0.072*0.65 at the aggregate. The direct nonpecuniary effect is 0.4 individually and 0.4*0.65 at the aggregate. The ratio of the indirect loss to the direct pecuniary and nonpecuniary loss is therefore 1.9. Alternatively, we can express the indirect effect as a multiple of the direct pecuniary effects on the unemployed. In this case, the indirect effect is 12.6 as big.
      Table 3 lists the decomposition for all the measures of well-being. Its last two columns show the ratio of indirect effects to direct effects, and the ratio of total non-pecuniary effects to pecuniary effects. They show that the nonmonetary cost of unemployment is about 6 to 9 times as large as the monetary costs, and that the indirect effects of unemployment at the population level are substantially greater than the direct loss suffered by the unemployed themselves. Individually the indirect effects are small, but they affect a much broader population.
      We can summarize the accounting exercise using the averages from the first four measures of well-being: if the direct monetary loss of the unemployed themselves is 1, the additional SWB loss of the unemployed is about 5, while at the population level the indirect or spillover effect is about 16 including the impact of monetary loss to other household members. All together, the total well-being costs of unemployment are about 20 times as large as those directly due to the lower incomes of the unemployed.”
    • Atkinson, Luttrell, and Rosenblum 2013: “In 2008-12, unemployment related to the weak economy prevented roughly $900 billion in earnings.12 According to the findings in Helliwell and Huang, society would have given up fifteen times this–$14 trillion (in 2012 dollars, 90 percent of 2007 output)–to avoid the negative consequences to well-being from unemployment rising above its natural rate through year-end 2012.
      As usual, caution comes with such a large number. The various survey-based studies that estimate the cost of unemployment on well-being have arrived at different results depending on what questions were asked to measure well-being, in what country or countries the survey was taken, and the segment of the population that was surveyed. For example, Clark (2003) found no statistically significant spillover to society from a high unemployment rate in the U.K.
      Some studies have argued that surveys of well-being are not measuring the correct concept. Most surveys inquire about the respondents’ “life satisfaction.” Answering this requires a person’s cognitive judgment about what constitutes happiness and likely a comparison to people around them and to other points in their own life. This comes with baggage not associated with economists’ concept of utility. Knabe et al. (2010) instead aggregate up “experience utility” from how German survey respondents spend their time and how they feel during various situations. They find that while the unemployed are sadder than the employed during a given activity, the unemployed are able to spend more time on activities that are more pleasant than work, which offsets the negative effect from unemployment. They find the net effect of unemployment on time-weighted well-being to be negligible.
      These results may not hold in the U.S., and intuition suggests that unemployment is not a pleasant experience. However, they highlight the issues with directly asking people about their well-being and drawing macroeconomic conclusions from the results. One behavioral researcher in this area has noted that a lack of “earned success” has displaced the satisfaction of millions of Americans who have fallen on hard times.13 Surveys also suggest that the intangible consequences of joblessness are not just psychological because unemployment is also associated with worse physical health. The psychological and physical impact of unemployment worsens with the length of unemployment as stress accumulates and savings are depleted (McKee-Ryan et al. 2005). The median duration of unemployment was 16.3 weeks as of June 2013, remaining elevated above even previous recession highs (Figure 7). This implies that the total nonpecuniary costs were great not only due to the number of unemployed, but also because the burden on the average unemployed worker was greater than in previous recessions. Long-term unemployment is troubling from an economic perspective as well. It is possible that extended bouts of unemployment could cause workers to lose familiarity with technical aspects of their occupation. There is also some evidence that employers view extended unemployment as a stigma, making those workers less likely to be hired even if the extended unemployment is due only to weak economic conditions (CBO 2012). Both of these effects would reduce workers’ lifetime earnings and the U.S. economy’s potential output. We do not add the large nonpecuniary costs of unemployment to the total cost of the crisis because of the uncertainty of measurement. However, the burden of unemployment should further reinforce the possibility that the output loss estimate of 40 to 90 percent of one year’s output drastically understates the true cost of the crisis.”
  • 28.

    EPI State of Working America 2012:

    • “Figure 4W. Increase in worker wages from a 1 percentage-point fall in unemployment, by wage group. Estimates are based on a model employed by Katz and Krueger (1999). Annual changes in log wages are regressed on unemployment, lagged log-changes in the CPI-U-RS (but, following Katz and Krueger the coefficient on this is constrained to equal 1), lagged productivity growth, and dummies for 1989–1995, 1996–2000, and 2001–2007 (excluded period is 1979–1988). The sample covers the years 1979–2007.”
    • “Table 4.24. Impact of rising and falling unemployment on wage levels and gaps, 1979– 2011. Table is based on analyses of yearly wage decile data from Tables 4.5 and 4.6 (see Appendix B), and of unemployment data using model from Katz and Krueger (1999). The unemployment rate is from the Current Population Survey. The simulated effect of change of unemployment presented in the table was calculated by regressing the log-change of nominal wages on the lagged log-change of the CPI-U-RS (but, following Katz and Krueger [1999], the coefficient is constrained to equal 1), the unemployment rate, lagged productivity growth, and dummies for various periods (1989–1995, 1996–2000, 2001–2007). Using these models, wages were predicted for the periods in the table given a simulated unemployment rate series in which unemployment remains fixed at its starting-year level. So in the 1979 to 1985 period, unemployment was fixed at its 1979 level and not allowed to rise (as actually happened) throughout the period. The “estimated cumulative impact of unemployment” shows the difference between actual wages and the wages when unemployment was held fixed in the starting year.”
  • 29.

    Katz and Krueger 1999 Table 8.

  • 30.
    • “Our main data source is the Euro-Barometer Survey Series. Partly the creation of Ronald Inglehart at the University of Michigan, it records happiness and life satisfaction information on 264,710 people living in twelve European countries over the period 1975 to 1991. A cross-section sample of Europeans is interviewed each year. One question asks “Taking all things together, how would you say things are these days–would you say you’re very happy, fairly happy, or not too happy these days?”. Another elicits answers to a “life satisfaction” question. This question, included in part because the word happy translates imprecisely across languages, is worded, “On the whole, are you very satisfied, fairly satisfied, not very satisfied or not at all satisfied with the life you lead?”. We concentrate on the life satisfaction data because they are available for a longer period of time – from 1975 to 1991 instead of just 1975-86. Unsurprisingly, happiness and life satisfaction are correlated (the correlation coefficient is 0.56 for the available period 1975-86), so a focus on life satisfaction may be sufficient.”
    • “To put this differently, in column 2 of Table 1 the well-being cost of a 1 percentage-point increase in the unemployment rate equals the loss brought about by an extra 1.66 percentage-points of inflation. The reason is that 1.66=0.0233/0.014, where 0.0233 is the marginal effect of unemployment on well-being, and 0.014 is the marginal effect of inflation on well-being (where 0.014 is derived from 0.14 multiplied by 0.01). Hence 1.66 is the marginal rate of substitution between inflation and unemployment. Because this number is larger than unity, the well-known ‘misery index’ is not an accurate representation of the data.”
    • “At the margin, unemployment depresses reported well-being more than does inflation. In a panel that controls for country fixed-effects, year effects and country- specific time trends, the estimates suggest that people would trade off a 1 percentage- point increase in the unemployment rate for a 1.7 percentage-point increase in the inflation rate. Hence, according to these findings, the famous misery index W(p+U) under-weights the unhappiness caused by joblessness. Unemployment appears to be more costly than inflation.”
  • 31.
    • “The most directly relevant analysis of happiness and the business cycle comes from di Tella, MacCulloch and Oswald (2001). Analyzing a country-year panel, they find that life satisfaction declines with unemployment and inflation, controlling for country and year fixed effects. Their work was based on an unbalanced panel of Eurobarometer survey data covering twelve European nations from 1975-1991. My analysis uses the same survey, but updates it to cover sixteen countries running from 1973-98 (Schmitt and Scholz, 2002). Thus, I start by updating these results in Table 1, as described below.
      The Eurobarometer happiness question (shown above) was asked only from 1975-86 (excluding 1980 and 1981), while the life satisfaction question was asked every year from 1973- 98, except 1974 and 1996. Overall, this yields an unbalanced panel of 504,581 valid responses to the life satisfaction question in 274 country-years, and 134,590 responses to the happiness question over 99 country-years.2 Answers to the two questions are highly correlated, and so given the greater data availability, my analysis will focus on life satisfaction.”
    • “The ratio of the coefficients on unemployment and inflation—shown in the third row— gives some sense of how the public feels about the unemployment-inflation trade-off. Whereas di Tella, Oswald and MacCulloch had found the public to be indifferent between raising unemployment for a year by one percentage point and raising inflation by 1.7 percentage points, this larger sample suggests that the inflation-unemployment trade-off is closer to five to one. That is, the public appears to be extremely averse to unemployment.
      These results can be used to speculate about the effects of disinflation on well-being. Feldstein (1997, p.123) has claimed a widespread professional consensus that inflation has important adverse effects and that “these adverse effects justify the sacrifices in employment and output that are generally needed to reduce inflation.” These well-being data give a new way to evaluate these costs and benefits.
      Consider a central bank trying to decide whether to reduce inflation by one percentage point. The costs of such a policy derive from estimates of the sacrifice ratio, often drawn from estimates of the slope of the short-run Phillips Curve. These estimates suggest that the cost of such a policy is that unemployment must be kept above its equilibrium level by two percentage points for a year. The benefits of this temporary contraction are assumed to be permanent, and hence assuming a discount rate of 6 percent, permanently reducing inflation by 1 percentage point has a present value equivalent to 16-percentage point-years of lower inflation. Would the public be willing to trade 2 percent-years of higher unemployment for 16 percent-years of lower inflation?
      The preferences over inflation and unemployment described in Table 1 suggest that this is a close call. If the effect on unemployment is temporary and the effect on inflation permanent, then disinflation probably enhances well-being. However, if the rise in unemployment following a monetary contraction is not completely transitory (as suggested by Ball 1997 or Blanchard and Wolfers, 2000), or the decline in inflation is not completely persistent, then disinflation probably lowers well-being. Indeed, the results in Table 1, when interpreted jointly with evidence of heterogeneous and persistent costs of disinflation (Ball 1994, Ball 1997) suggest that, for some countries, disinflation almost certainly undermines well-being.”
  • 32.

    “We make use of a large European dataset, covering the period 1975 to 2013, to estimate happiness equations in which an individual subjective measure of life satisfaction is regressed against unemployment and inflation rate (controlling for personal characteristics, country and year fixed effects). We interpret the coefficients on unemployment and inflation as implicit weights on a subjective welfare function. We compute a weighted misery ratio that can be interpreted as the trade-off between inflation and unemployment that will leave people, on average, equally happy. The main results of this paper can be summarized as follows:

    • Unemployment lowers happiness of the unemployed but also the happiness of everyone else.
    • We estimate the unemployment/inflation trade-off as approximately 5.6, when the whole sample is used. That is to say a 1 percentage point increase in unemployment lower well- being nearly six times more than an equivalent rise in inflation. Using only the five main euro area countries that are especially worried about inflation – Germany, Austria, France, Finland and Austria – the elasticity decreases to one.
    • We find that women and, somewhat surprisingly, the old put the highest weight on unemployment.

    Our results using survey data depart from the more common finding in the macroeconomic literature which puts more weight on inflation rather than on unemployment. In order to investigate this further, we have analyzed the role of persistence using a simple model of forward expectations. The marginal rate of substitution is substantially reduced, though still greater than unity, and though the central bank would pay more attention to inflation, the implication of the results would still be that unemployment be given a greater weight.”

  • 33.

    Mishkin 2008 argues in favor of, but does not fully support, this claim:

    • “Both economic theory and empirical evidence indicate that the stabilization of inflation promotes stronger economic activity in the long run.2 Two principles underlie that conclusion. The first principle is that low inflation is beneficial for economic welfare. Rates of inflation significantly above the low levels of recent years can have serious adverse effects on economic efficiency and hence on output in the long run. The distortions from a moderate to high level of long-run inflation are many. High inflation can cause confusion among households and firms, thereby distorting savings and investment decisions (Lucas, 1972; Briault, 1995; Shafir, Diamond, and Tversky, 1997). The interaction of inflation and the tax code, which is often applied to nominal income, can have adverse effects, especially on the incentive of firms to invest in productive capital (Feldstein, 1997). Infrequent nominal price adjustment implies that high inflation results in distorted relative prices, thereby leading to an inefficient allocation of resources (Woodford, 2003). And high inflation distorts the financial sector as firms and households demand greater protection from inflation’s erosion of the value of cash holdings (English, 1999).
      The second principle is the lack of a long-run tradeoff between unemployment and the inflation rate. Rather, the long-run Phillips curve is vertical, implying that the economy gravitates to some natural rate of unemployment in the long run no matter what the rate of inflation is (Friedman, 1968; Phelps, 1968). 3 The natural rate, in turn, is determined by the structure of labor and product markets, including elements such as the ease with which people who lose their jobs can find new employment and the pace at which technological progress creates new industries and occupations while shrinking or eliminating others. Importantly, those structural features of the economy are outside the control of monetary policy. As a result, any attempt by a central bank to keep unemployment below the natural rate would prove fruitless. Such a strategy would only lead to higher inflation that, as the first principle suggests, would lower economic activity and household welfare in the long run.”
    • “One critical precondition for effective central-bank easing in response to adverse demand shocks is anchored long-run inflation expectations. Otherwise, lowering short- term interest rates could raise inflation expectations, which might lead to higher, rather than lower, long-term interest rates, thereby depriving monetary policy of one of its key transmission channels for stimulating the economy. The role of expectations illustrates two additional basic principles of monetary policy that help explain why stabilizing inflation helps stabilize economic activity: First, expectations of future policy actions and accompanying economic conditions play a crucial role in determining the effects of current policy actions on the economy. Second, monetary policy is most effective when the central bank is firmly committed, through its actions and statements, to a “nominal anchor”—such as to keeping inflation low and stable. A strong commitment to stabilizing inflation helps anchor inflation expectations so that a central bank will not have to worry that expansionary policy to counter a negative demand shock will lead to a sharp rise in expected inflation—a so-called inflation scare (Goodfriend, 1993, 2005). Such a scare would not only blunt the effects of lower short-term interest rates on real activity but would also push up actual inflation in the future. Thus, a strong commitment to a nominal anchor enables a central bank to react more aggressively to negative demand shocks and, therefore, to prevent rapid declines in employment or output.
      Unlike demand shocks, which drive inflation and economic activity in the same direction and thus present policymakers with a clear signal for how to adjust policy, supply shocks, such as the increases in the price of energy that we have been experiencing lately, drive inflation and output in opposite directions. In this case, because tightening monetary policy to reduce inflation can lead to lower output, the goal of stabilizing inflation might conflict with the goal of stabilizing economic activity.
      Here again, a strong, previously established commitment to stabilizing inflation can help stabilize economic activity, because supply shocks, such as a rise in relative energy prices, are likely to have only a temporary effect on inflation in such circumstances. When inflation expectations are well anchored, the central bank does not necessarily need to raise interest rates aggressively to keep inflation under control following an aggregate supply shock. Hence, the commitment to price stability can help avoid imposing unnecessary hardship on workers and the economy more broadly.
      The experience of recent decades supports the view that a substantial conflict between stabilizing inflation and stabilizing output in response to supply shocks does not arise if inflation expectations are well anchored. The oil shocks in the 1970s caused large increases in inflation not only through their direct effects on household energy prices but also through their “second round” effects on the prices of other goods that reflected, in part, expectations of higher future inflation. Sharp economic downturns followed, driven partly by restrictive monetary policy actions taken in response to the inflation outbreaks. In contrast, the run-up in energy prices since 2003 has had only modest effects on inflation for other goods; as a result, monetary policy has been able to avoid responding precipitously to higher oil prices. More generally, the period from the mid-1960s to the early 1980s was one of relatively high and volatile inflation; at the same time, real activity was very volatile. Since the early 1980s, central banks have put greater weight on achieving low and stable inflation, while during the same period, real activity stabilized appreciably. Many factors were likely at work, but this experience suggests that inflation stabilization does not have to come at the cost of greater volatility of real activity; in fact, it suggests that, by anchoring inflation expectations, low and stable inflation is an important precondition for macroeconomic stability.”
  • 34.
  • 35.

    Several other sources have made arguments along these lines:

    • Economist 2014a: “While the circumstances facing the Fed may be novel, the tactical challenge is not. Two decades ago, inflation was above any reasonable definition of price stability. In contemplating how to get it lower, Fed officials came up with the moniker of “opportunistic disinflation.” The Fed would not deliberately push the economy into recession, but it would exploit the inevitable recessions and resulting output gaps that came along to nudge inflation closer to target. In 1996 then governor Laurence Meyer defined it thus:
      “Under this strategy, once inflation becomes modest, as today, Federal Reserve policy in the near term focuses on sustaining trend growth at full employment at the prevailing inflation rate. At this point the short-run priorities are twofold: sustaining the expansion and preventing an acceleration of inflation. This is, nevertheless, a strategy for disinflation because it takes advantage of the opportunity of inevitable recessions and potential positive supply shocks to ratchet down inflation over time.”
      The strategy succeeded: after the recession of 2001, inflation fell to 2% and stayed there.
      Today’s mirror image would be “opportunistic inflation”: exploit any overheating in the economy as an opportunity to push inflation higher. If unemployment does fall to 5% next year, that should have two beneficial effects for the labour market. First, it should push up wages. Hourly earnings rose 0.4% in November, an unexpectedly brisk and long overdue increase. But they are still up just 2.1% from a year earlier. Since profit margins are so wide, it will take several years of stronger wage growth to generate cost-push inflation. Second, some of the long-term unemployed who have quit the labour force should be drawn back in, reversing some of the loss of potential output brought about by the prolonged period the economy spent depressed.
      To get inflation higher requires a negative output gap by allowing unemployment to fall below its natural rate for a time. That may happen even on the current plan in which interest rates start to rise slowly from zero in 2015. If so, the Fed should simply let it happen. It may want to encourage the process by delaying the normalization of rates, or stretching it out over more months. This is not without pitfalls; inflation could take off more quickly than expected, or financial imbalances could worsen. On the other hand, inflation may stay dormant for longer, and the Fed will then conclude the natural rate of unemployment is actually lower than 5%; and it will have been glad not to have tightened too soon.”
    • IMF 2013: “We estimate the model for all advanced economies for which data are available, which produces estimates for 21 countries, usually starting in the 1960s. The results are remarkably consistent across countries (Figure 3.6) and tell a story that confirms the preliminary results:
      • Unemployment gaps have opened in many countries. Figure 3.6, panel 1, confirms the findings reported in Figure 3.2 that there are unemployment gaps in almost all the countries in the data set. Further- more, because a number of countries have very large unemployment gaps, the distribution is skewed and the average is above the median.
      • The responsiveness of inflation to unemployment has been gradually declining over the past several decades. Figure 3.6, panel 2, shows that k has decreased (that is, the average slope of the Phillips curve has flattened). The interquartile range also demonstrates that this decline occurred throughout the advanced economies in the data set. Furthermore, in results not reported here, there is a correlation between the level of inflation and the slope, as suggested by Figure 3.5. However, the degree of potential nonlinear- ity is very modest at the rates of inflation observed over the past few decades. We consider some of the implications of a flatter Phillips curve for policy in Box 3.1.
      • The relationship between current and past inflation has weakened over time. Figure 3.6, panel 3, shows that ? has increased since the 1970s, which means that the persistence of inflation has declined such that deviations of inflation expectations from its long-term trend are more short lived relative to the 1970s—in short, inflation has become more “anchored.” Once again, this is a change that has occurred throughout advanced economies.”
    • Goldman Sachs Global Investment Research, July 25, 2014 - FOMC Preview: Eyes on the Dashboard: “But the more important point is that the inflation costs of misjudging slack—however measured—are likely to be smaller than in the past. The reason is that inflation has become progressively less responsive to slack as inflation expectations have become more firmly anchored on the Fed’s target, as we and others have shown in past research…. [T]he likely inflation costs of misjudging slack have declined substantially over the past 25 years.”
  • 36.
    • Yellen and Akerlof 2004: “In the United States, ß is commonly estimated to be about 1/2, so, as a rule of thumb, a one percentage point rise in the unemployment rate, maintained for one year, decreases inflation by about 1/2 percentage point.”
    • Bernstein and Baker 2013: “The second point is that the cost in terms of higher inflation of being below the NAIRU is less than was previously the case. Prior research has suggested a tradeoff of roughly a 0.5 percentage-point increase in the rate of inflation with an unemployment rate that was a full percentage point below the NAIRU for an entire year. So if the NAIRU was in fact 5.0 percent, but we pursued an expansionary policy that allowed the rate of unemployment to fall to 4.0 percent, then the rate of inflation, had it been, say, 2.0 percent, after a year would be 2.5 percent. The new research suggests a tradeoff of just 0.3 percentage points after a year. Of course, the theory still implies that inflation will continue to rise as we sustain the unemployment rate a full point below the NAIRU, but, if we take steps to slow the economy and raise the unemployment rate back to the NAIRU, we could prevent any further rise and allow the inflation rate to stabilize at 2.3 percent instead of the prior 2.0 percent.”
  • 37.

    Several other commentators have made arguments along these lines:

    • Evans 2014: “I believe that the biggest risk we face today is prematurely engineering restrictive monetary conditions. In this scenario, the FOMC could misjudge the presence and magnitude of economic impediments and misread the recent progress we have made as evidence of sounder economic trends. If we were to presume prematurely that the U.S. economy has returned to a more business-as-usual position and reduce monetary accommodation too soon, we could find ourselves in the very uncomfortable position of falling back into the ZLB environment. Such an outcome could be a serious setback to the timely attainment of our dual mandate policy objectives.

      This risk consideration means that the decision to lift the funds rate from zero should be made only when we have a great deal of confidence that growth has enough momentum to reach full employment and that inflation will return to a sustainable 2 percent rate. We should also proceed cautiously and keep the path of rate increases relatively shallow for some time after we begin to raise rates. This approach will allow us time to assess how the economy is performing under less accommodative financial conditions and reduce the odds of overaggressive rate hikes choking off progress toward our policy goals.

      Past experience with the ZLB also counsels this strategy. History has not looked kindly on attempts to prematurely remove monetary accommodation from economies that are in or near a liquidity trap. Three occasions come readily to mind: the Great Depression (which was resolved only with the massive fiscal expansion of World War II), Japan over the past 20 years, and the recent European experience. Indeed, both of the more recent episodes are ongoing today, though Japan finally appears to be making important headway toward raising inflation and eventually exiting the ZLB.

      The U.S., Japanese and European lessons from monetary history strongly suggest that there are great risks to premature liftoff from the ZLB or near-ZLB conditions. Unless the economy is fundamentally strong and the previous impediments to growth have receded sufficiently, the odds remain high that some unforeseen shock could cause the monetary authority to retreat right back into the ZLB.

      And the costs of being mired in the ZLB are simply very large. The ZLB prevents using our very best policy tools to address negative shocks. The ZLB means that interest rates cannot fall low enough to equate the supply of saving with the demand for investment, which, of course, significantly impedes capital formation, future economic growth, and the health of labor markets. And the ZLB often comes hand in hand with undesirably low inflation or even a falling price level, carrying with it the associated costs of debt deflation on the real economy.

      What about the other risk to our policy goals that I mentioned — the risk that the U.S. economy could face pricing pressures that accelerate rapidly and ultimately leave inflation far above our 2 percent target for an unacceptably long period?

      At some point, when the economy has clearly overcome the remaining impediments from the largest economic and financial downturn since the Great Depression, the odds of inflation rising noticeably above target could become palpable. But such a breakout is just not at all very likely today. Indeed, many Fed critics have been voicing this concern since 2009, and it hasn’t even come close to happening.

      What if inflation just ran moderately above target for some time? Well, I see the costs of this outcome as clearly being much smaller than the costs of falling back into the ZLB. First, I believe the U.S. economy could weather the modest increases in interest rates that would be needed to keep inflation in check. Such rate increases would be manageable for the real economy; this is particularly true if industry and labor markets have already made the most difficult reallocations of jobs and overcome other factors so that productive resources are more efficiently and fully employed. Second, as I’ve noted many times in the past, a symmetric inflation target means we should be averaging 2 percent inflation over time. We’ve averaged well under that 2 percent mark for the past six and a half years. With a symmetric inflation target, one could imagine moderately above-target inflation for a limited time as simply the flip side of our recent inflation experience — and hardly an event that would impose great costs on the economy.

      The murky state of inflation expectations is another factor that enters my risk-management considerations. For inflation to take off rapidly, we would have to see a jump in inflationary expectations. But inflationary expectations certainly have not taken off. Indeed, we may be facing a quite different problem.

      Many forecasters — myself included — assume that stable 2 percent inflation expectations will be an important factor helping to pull actual inflation up. Over the past five years, professional forecasters’ projections for long-run inflation have been at the 2 percent target and the Treasury Inflation-Protected Securities (TIPS) break-evens generally have been flat. Yet actual inflation has only just recently made it back up to 1-1/2 percent. Moreover, we still have not seen much at all in the way of higher inflation compensation being built into interest rates or wages. So there is cause for concern that expectations might not produce as strong a pull on inflation as we hope. This unusual situation has precedent, for example, in Japan, where inflation expectations have remained stable, while inflation itself has lagged for a prolonged period. Of course, there is a risk, too, that inflation expectations themselves could fall—indeed, I would note that longer-dated TIPS break-evens have recently dropped to the lower end of their post-crisis range.”

    • Economist 2014b: “I recently attended a conference at the Hoover Institution on central banking where many of the presenting scholars were deeply concerned the Federal Reserve’s unorthodox policies would lead to an eruption of inflation before long. Many cited the 1970s when the Fed kept real interest rates too low for too long in the mistaken belief the economy was operating below potential. What these analyses ignore is the asymmetry of risks facing the economy. Of course, the Fed might wait too long to tighten and inflation could eventually rise above the 2% target. But, leaving aside how costly such a deviation would be, the Fed has demonstrated it knows how to get inflation back down, even if the process can be costly. By contrast, recent history shows how few effective tools central banks have for reversing inflation that falls too far, or turns to deflation. Either outcome raises the prospect of real interest rates that are too high and unemployment above its natural rate for years to come. Given this asymmetry, overshooting inflation is clearly a lesser evil than undershooting inflation. This, more than anything else, is why the panic over inflation is misplaced.”
  • 38.

    Crump et al. 2014 “One advantage of the flexibility of the SPD and SMP is that the perceived likelihood of such scenarios can be assessed by adding specific questions to the surveys. In fact, the September and October 2014 surveys specifically asked respondents for their assessment of the probability of returning to the zero bound within two years following liftoff. In both surveys, the median respondent assigned a 20 percent probability to the target rate returning to the zero bound during this timeframe, though responses from SMP participants were slightly more dispersed. Additionally, respondents were asked to assess the probability distribution of the pace of tightening following the first increase in the policy rate, conditional on not returning to the zero lower bound. As shown in the chart below, the conditional expected pace of tightening in the first and second twelve-month periods after liftoff lies above both the unconditional expected and the market-implied pace of tightening.”

  • 39.

    New York Times 2014a is the source of our figures for corporate profits and labor share of income: “Corporate profits are at their highest level in at least 85 years. Employee compensation is at the lowest level in 65 years.
    The Commerce Department last week estimated that corporations earned $2.1 trillion during 2013, and paid $419 billion in corporate taxes. The after-tax profit of $1.7 trillion amounted to 10 percent of gross domestic product during the year, the first full year it has been that high. In 2012, it was 9.7 percent, itself a record.
    Until 2010, the highest level of after-tax profits ever recorded was 9.1 percent, in 1929, the first year that the government began calculating the number.
    Before taxes, corporate profits accounted for 12.5 percent of the total economy, tying the previous record that was set in 1942, when World War II pushed up profits for many companies. But in 1942, most of those profits were taxed away. The effective corporate tax rate was nearly 55 percent, in sharp contrast to last year’s figure of under 20 percent.
    The trend of higher profits and lower effective taxes has been gaining strength for years, but really picked up after the Great Recession temporarily depressed profits in 2009. The effective rate has been below 20 percent in three of the last five years. Before 2009, the rate had not been that low since 1931.
    The statutory top corporate tax rate in the United States is 35 percent, and corporations have been vigorously lobbying to reduce that, saying it puts them at a competitive disadvantage against companies based in other countries, where rates are lower. But there are myriad tax credits, deductions and preferences available, particularly to multinational companies, and the result is that effective tax rates have fallen for many companies.
    The Commerce Department also said total wages and salaries last year amounted to $7.1 trillion, or 42.5 percent of the entire economy. That was down from 42.6 percent in 2012 and was lower than in any year previously measured.
    Including the cost of employer-paid benefits, like health insurance and pensions, as well as the employer’s share of Social Security and Medicare contributions, the total cost of compensation was $8.9 trillion, or 52.7 percent of G.D.P., down from 53 percent in 2012 and the lowest level since 1948.”

    Several other commentators have made arguments along these lines:

    • Economist 2014a: “If unemployment does fall to 5% next year, that should have two beneficial effects for the labour market. First, it should push up wages. Hourly earnings rose 0.4% in November, an unexpectedly brisk and long overdue increase. But they are still up just 2.1% from a year earlier. Since profit margins are so wide, it will take several years of stronger wage growth to generate cost-push inflation.”
    • Clarida 2014: “Labor compensation as a share of national income fell sharply in 2009–2010 and has remained depressed since then (see Figure 1). Indeed, labor’s 0.65 share of national income at the end of 2013 was the smallest slice of national income paid to labor in at least 60 years!
      While there has been justifiable focus on the downward trend in labor’s share, the chart also makes clear that in past business cycle expansions, there has also been a pronounced cyclicality in labor’s share of national income. In the three expansions during the ”Great Moderation” – the quarter century after Paul Volcker broke the back of inflation – labor’s share of income initially fell during the early dates of recovery and then began to rebound during the expansion phase of the business cycle. Importantly, this rise in labor’s share occurred before, and usually well before, the business cycle peak and continued as the economy fell into recession. The rise in labor’s share that occurs during recessions is well known and is usually attributed to the desire of firms to “hoard” labor initially in downturns as sales decline – holding off on firing workers until the decline in demand is clearly expected to persist. What is less well appreciated is the phenomenon of labor’s rising share of income well in advance of the peak in economic activity and for reasons unrelated to labor hoarding.
      If the past is prologue with regard to labor’s share and, as in past cycles, it does begin to rise as unemployment falls toward the nonaccelerating inflation rate of unemployment (NAIRU), what are the possible inflationary consequences? Interestingly, during the last three U.S. business cycles, the rise in labor’s share that commenced during the expansion phase of the business cycle was not accompanied by a material rise in PCE inflation (see Figure 2).
      The contemporaneous relationship between changes in inflation and increases in labor’s share was negative in two of the last three business cycles – inflation fell as labor’s share of income rose – and essentially flat in the 1997–2001 episode. So, at least since Volcker, there has been no automatic or mechanical pass-through from a rise in labor’s share of the pie to PCE inflation. As it did during the Great Moderation, any pass-through, when and if labor’s share rebounds in this cycle, will depend on three factors: productivity growth, pricing power and the policy rate set by the Fed.
      The markets will be following closely how labor productivity and company pricing power evolve in tandem with compensation costs in coming quarters. The most favorable scenario for workers? Labor’s share of income rises in tandem with a combination of stronger productivity growth and, perhaps, some profit margin compression to produce a “goldilocks” outcome – a boost in the purchasing power of real wages without an unwanted surge in inflation significantly above the Fed’s 2% target. On the other hand, an unfavorable scenario for all concerned would be a rise in labor’s share accompanied by a productivity slowdown and aggressive efforts by companies to maintain existing profit margins at or near record peaks as a share of national income. In this case, the economy could face at least a whiff of stagflation. During the late 1960s and the 1970s, as inflation and inflation expectations began to rise, increases in labor’s share were largely passed through to headline inflation, in stark contrast to the post-Volcker track record. In fact, the all-time peak in labor’s share of income, 0.7127, was recorded during the 1980 recession, when PCE inflation exceeded 10%.
      No one – certainly not this author – is predicting a return of labor market clout with the bargaining power to fuel double-digit inflation. But even with a modest increase in inflation from current levels, the Fed could face a situation in which real wage gains and falling unemployment – both welcome – occur in tandem with a rise in inflation above the 2% target. That said, Fed officials have emphasized that 2% is an inflation target, not a ceiling, and that inflation has, in fact, been running below 2% since 2012.”
    • Financial Times 2014: “But it’s important to remember that an uptick in wage growth from its currently weak pace wouldn’t necessarily be inflationary, at least not right away.
      We’ve recently come across two helpful items — one from a BCA Research note and another from an article by Cleveland Fed economists — explaining why.
      Martin Barnes, an economist at BCA, starts by noting the divergence between productivity growth and lagging real compensation growth in the 2000s. Companies reaped the gains, which manifested themselves in higher profit margins.
      Barnes estimates that real compensation would otherwise have been 10 per cent higher if the previous relationship with productivity growth had held, and “EBITD [earnings before income, tax, depreciation] margins would be almost exactly in line with their historical average, as opposed to four standard deviations above”.
      ….
      Historically high profit margins and weak inflation abroad can slow the transmission from faster wage growth to higher overall inflation. There’s no guarantee that they will, of course. But the possibility reinforces the idea that much faster wage growth can, for a while, be safely pursued without worrying it will lead to intolerably high inflation or the destabilisation of inflation expectations.”
  • 40.

    Bernstein 2014: “The Congressional Budget Office sets the natural rate at 5.5 percent. The Federal Reserve says it’s between 5.2 and 5.5 percent. By those measures, we’re within spitting distance today. If you believe they are correct, you might want the Fed to tap the brakes about now.
    But there are reasons to doubt whether they are correct. If the economy were close to full employment, wage growth and inflation would probably be substantially stronger than they are right now.
    We know that economic slack and price pressures are usually negatively correlated. (Slack is the quantity of labor and capital that could be employed productively, but isn’t.) So more slack, less inflation. But we don’t know the strength or magnitude of the correlation between the two factors, in no small part because it changes over time, buffeted by factors ranging from the known, like changes in the supply of goods that feed directly into inflation, and the unknown, like speedups or slowdowns in productivity growth. We can see it happening, but we just don’t know why. It’s often hard to identify what’s behind productivity growth.
    Most recently, two factors are playing an important role in dampening the so-called reaction function that translates diminished slack into faster price and/or wage growth. First, the bargaining clout of the American worker is unusually low right now; even steadily falling unemployment hasn’t translated into wage gains. Second, an important part of what drives inflation is expectation about its future path, and the Fed has worked hard over the years to ensure “well-anchored inflationary expectations” around its target of 2 percent inflation.
    Given all of these moving parts, we don’t know what the Nairu is. And we haven’t for quite some time.
    As Dean Baker and I document in our recent book on the importance of returning to full employment, back in the 1990s, the consensus was that the Nairu was 6 percent. “Ye who dares tread below that rate risks triggering an inflationary spiral,” went the mythology of the time.
    As unemployment fell below this alleged natural rate in the 1990s, wage pressures did in fact begin to build. But the Federal Reserve chairman at the time, Alan Greenspan, recognized that because productivity growth was accelerating, wage growth didn’t obviously have to feed into price growth. Firms could maintain healthy profit margins and still raise pay (those were the days!).
    Long story short, in the last few months of 2000, the unemployment rate fell below 4 percent and inflation was still well behaved. Economists’ Nairu estimates were way off. A group of top econometricians took a careful look at our ability to accurately pin down the Nairu and concluded: “Our main finding is that the natural rate is measured quite imprecisely.” They found margins of error to be wide, to the tune of three to four percentage points.”

  • 41.

    Economist 2014a argues along these lines: “To get inflation higher requires a negative output gap by allowing unemployment to fall below its natural rate for a time. That may happen even on the current plan in which interest rates start to rise slowly from zero in 2015. If so, the Fed should simply let it happen. It may want to encourage the process by delaying the normalization of rates, or stretching it out over more months. This is not without pitfalls; inflation could take off more quickly than expected, or financial imbalances could worsen. On the other hand, inflation may stay dormant for longer, and the Fed will then conclude the natural rate of unemployment is actually lower than 5%; and it will have been glad not to have tightened too soon.”

  • 42.

    Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, December 2014:

    Each shaded circle indicates the value (rounded to the nearest 1/8 percentage point) of an individual participant’s judgment of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run.

    Disagreement between FOMC members over the appropriate target federal funds rate spans nearly 2 points at the end of 2015 and roughly 3.5 at the end of 2016 (though in the 2016 case, a couple of outliers account for much of the disagreement).

  • 43.
    • Ball 2013: “Why do today’s central bankers oppose 4% inflation when Paul Volcker did not? The answer is not that research has identified new costs of inflation. Instead, policymakers have developed an aversion to inflation that is out of proportion to its true costs. There are two reasons.
      One is the tendency for policymakers to fight the last war. The high inflation of the 1970s was a scarring experience that has dominated the thinking of central bankers since then. Before the crisis
      of 2008, the 1970s were considered the worst monetary-policy disaster since World War II. Policymakers believed that their most important job was to prevent another inflationary episode: nobody wanted to be remembered for reversing Volcker’s conquest. This mind-set has led policymakers to exaggerate the dangers of inflation.
      It is instructive to compare the monetary policy of recent decades to the 1960s and 70s. DeLong (1997) describes how “the shadow cast by the Great Depression” influenced the Federal Reserve in the earlier period. The memory of high unemployment made policymakers fearful of any action that might slow the economy, with the result that they let inflation accelerate. Since then the pendulum has swung the other way, with double-digit inflation replacing the Depression as the nightmare that central banks are determined not to repeat.”
    • We also heard this sentiment in two background conversations with people with deep knowledge of the Federal Reserve.
  • 44.
    • Economist 2014b: “I recently attended a conference at the Hoover Institution on central banking where many of the presenting scholars were deeply concerned the Federal Reserve’s unorthodox policies would lead to an eruption of inflation before long. Many cited the 1970s when the Fed kept real interest rates too low for too long in the mistaken belief the economy was operating below potential.”
    • Bloomberg News 2014a
  • 45.
    • Ball 2013: “The second factor that has influenced central bankers is theoretical research by academics. Kydland and Prescott (1977) convinced economists that central banks face a dynamic consistency problem that produces excessive inflation. Rogoff (1985) convinced economists that this problem is mitigated if policymakers are highly inflation-averse–more averse, even, than is justified by the true costs of inflation. As Bernanke (2004) has described, the Kydland-Prescott and Rogoff papers provide an intellectual justification for hawkish monetary policy.”
    • Schonhardt-Bailey 2014:
      • “Turning to the substance of monetary policy, the last thirty years have seen the emergence of a consensus worldwide around establishing and maintaining persistent low inflation as the appropriate goal of monetary policy. In the United States the shift to a consistent low inflation policy started with the so-called Volcker Revolution in 1979, followed by the disinflation of the 1980s and the subsequent entrenchment of low inflation. One of the chapters of this book includes an in-depth study of the role of deliberation in the FOMC during the Volcker Revolution, in recognition of the importance of that period for creating the sustained change in policymaking.
        There are two important components to the policy of sustained low inflation. The first involves the emergence of the idea that low inflation maximises the utility of the representative economic agent, consistent with the view that sustained low inflation is a necessary condition for sustained economic growth. On its own, however, monetary policy does not influence the long-run rate of growth of the economy; rather, according to the theory of the neutrality of money, it is a necessary condition to enable other economic policies to affect the growth rate. The second important component of the sustained low inflation policy concerns the role of the institutions of monetary policy, central banks, and in particular the structure of the independence of central banks as a necessary condition for a policymaking framework that can deliver persistent low inflation as the goal of monetary policy.”
      • “Applied to monetary policy, the effect of polarization on deliberations in committee hearings is ambiguous. On the one hand, strong evidence suggests that across the ideological spectrum, Congress has become far more polarized in the past 30 years (Poole and Rosenthal 1997; McCarty, Poole et al. 2006), and so we might expect more disagreement among committee members. On the other hand, the consensus among policy experts on the primacy of monetary policy for economic stabilization and the focus on the end goal of low inflation gained widespread and international acceptance during this same time period (Bean 2007; Goodfriend 2007), and so we might expect to find more agreement among legislators on the underlying objectives of monetary policy.”
      • “Others place a greater weight on the role of politics, but predominantly at the level of the Fed chairman—and only during the Burns (and possibly Martin) chairmanships. Hoskins, Blinder and Lindsey comment that during these previous chairs, the Fed was more influenced by politics. Hoskins notes simply that “in earlier days, two Fed Chairmen did react directly to the president. Martin and Burns.” Blinder characterizes monetary policy in this earlier period as more partisan (though also notes its possible resurgence in the aftermath of the financial crisis). He remarks that “the old-fashioned Republican-Democrat division” in terms of emphasis on inflation versus unemployment “may be coming back now”. But, Blinder: … if you look historically, the Republican Party and its predecessors going back to the Federalists in America were much more anti-inflation and much less worried about ‘full employment’. We didn’t have that phrase back in the old, old days, you know, and the Democrats [were] conversely much less worried about inflation if not indeed at some periods of time favouring inflation, and much more worried about growth and employment. That ended around Reagan, and there ceased being a political difference on the short-run trade-off between inflation and unemployment around Reagan’s time.”
    • Di Tella and MacCulloch 2007: “The efforts to derive high costs of inflation are more successful in the approach followed by Rotemberg and Woodford (1997), who focus on the second channel. They develop a model where structural relations are grounded in optimizing individual behavior and where firms must occasionally keep their prices fixed, resulting in substantial relative price distorsions when inflation increases. As discussed in Woodford (1999), their estimates for the United States imply a value for the costs of inflation relative to unemployment of the order of 20, if the output gap is measured in percentage points and inflation is measured at an annualized percentage rate. That is, the weight on inflation is 20 times the weight on the output gap in society’s welfare.”
    • Blanchflower et al. 2014: “Interpretations of the welfare costs of inflation focus on the real resource costs associated with asynchronous price changes or the reallocation of resources to government associated with increases in the money supply (inflation) and the resulting “inflation tax” - see Bailey (1956), Friedman (1971) and Lucas (2000). Models of the costs of inflation associated with asynchronous pricing models include Lucas (1973), Barro (1976), Benabou and Gertner (1993) and Rotemberg and Woodford (1998). For example, using structural VARs, Rotemberg and Woodford assess the relative costs of inflation and unemployment (incomplete stabilization) in a model where prices changes are staggered. The underlying welfare function ultimately depends on consumption and leisure. The welfare losses of inflation are indirect – they are due to the misallocation of resources associated with price instability, rather than due to a direct effect of inflation on utility. Using this analysis to calibrate a welfare loss function based on the price level and the output gap, Woodford (2001) suggests that “the relative weight on the output gap measure should only be about 0.1” (p.47), implicitly concluding that the welfare gains from price stability are significantly greater than those from stabilizing output and therefore unemployment.”
  • 46.

    Sumner 2014 argues along these lines: “The recent news has been dominated by the sharp fall in TIPS spreads. In the US, 5-year inflation expectations are down to 1.25% and the 10-year TIPS spread is 1.68%. Does this mean money is way too tight? Not necessarily, but it does suggest that money was way too tight back in early 2010 and mid-2011.
    Recall that I often say, “inflation doesn’t matter, only NGDP matters.” Back in early 2010 and mid-2011, CPI inflation briefly rose above 2%. Europe also experienced above target inflation at about this time. Many observers misinterpreted this data, believing it had implications for the proper stance of monetary policy, whereas in fact NGDP is the variable that matters.
    So if NGDP was so low, why was inflation above target? If there is anything we know about Phillips curve models it is that they are consistently unreliable. In early 2010 and mid-2011 there was a big increase in global commodity prices, driven by fast growth in places like China. This had no bearing on US NGDP or monetary policy. The underlying demand conditions were quite weak in both the US and Europe. In recent months the commodity boom is unwinding, and lower headline inflation is showing up. But this does not necessarily mean money is too tight in the US (although it quite likely is a bit too tight to hit the Fed’s dual mandate over the next 5 or 10 years.) Instead, the recent deflation is a distinct echo of the actual NGDP “deflation” (and why is there still no word for falling NGDP!!) that occurred in the early part of this decade. That’s when money was much too tight, but supply disruptions in the Middle East and Chinese demand temporarily inflated oil prices, helping to disguise the deflationary pressures. Now it is showing up.
    This all makes the hawks look ridiculous today. Indeed they have not one but two big problems:
    1. The hawks fought against monetary stimulus in 2010 and 2011, arguing that we needed to focus like a laser on 2% inflation. OK, but 5-year inflation expectations are now 1.25%, even lower in Europe. What do the hawks say today?
    2. The hawks are uncomfortable with low interest rates, and have developed dubious ad hoc “theories” that low rates will create asset market bubbles and financial instability. But how do we get higher rates? The hawks ignored the wisdom of Milton Friedman (that ultra-low interest rates mean money has been tight) and the Germans got the ECB to raise rates twice in 2011. The result is exactly as Friedman would have predicted. The US is about a year away from exiting the zero bound, whereas the eurozone is 5 or 10 years away, at best. The German plan backfired.
    Hawkishness was the superior monetary model in the 1970s, but has since degenerated into an atavistic set of urges: No inflation! Higher interest rates! (As if those two goals are compatible.) It’s very sad, and perhaps a blessing in disguise that Friedman is not here to seen his ideas being abandoned by the right wing of the profession.”

  • 47.

    See, e.g., DeLong 2014, surveying a variety of blog posts attempting to answer the question why sophisticated investors who might benefit financially from a tighter economy nonetheless frequently oppose Federal Reserve efforts to stimulate the economy.

  • 48.
    • Plosser 2014: “There is a point of view that rates cannot be raised because the labor market has not completely healed. That is, we must wait, maintaining our current stance of policy until we have achieved our goals. I think this is a risky strategy for three reasons.

      First, we do not know how to confidently determine whether the labor market is fully healed or when we have reached full employment. In January 2012, the FOMC affirmed in its statement of longer run goals and strategies that, “The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors, such as demographics or advancements in technology, may change over time and may not be directly measurable.” Chair Yellen gave an excellent speech at the Jackson Hole conference in August that highlighted some of the structural and nonmonetary factors affecting the labor market. Economists don’t fully understand how these factors may be influencing our efforts to assess the meaning and measurement of full employment.

      Second, if we wait until we are certain that the labor market has fully recovered before beginning to raise rates, policy will be far behind the curve. One risk of waiting is that the Committee may be forced to raise rates very quickly to prevent an increase in inflation. In so doing, this may create unnecessary volatility and a rapid tightening of financial conditions — either of which could be disruptive to the economy.

      This would represent a return of the so-called “go-stop” policies of the past. Such language was used to describe episodes when the Fed was aggressively providing monetary accommodation to stimulate employment and the economy — the go phase — only to find itself forced to apply the brakes abruptly to prevent a rapid uptick in inflation — the stop phase. This approach to policy led to more volatility and was more disruptive than many found desirable.

      A third risk to waiting is that the zero interest rate policy has generated a very aggressive reach for yield as investors take on either credit or duration risk to earn higher returns. While the Fed is attempting to monitor such behavior, it is difficult to know how or where the consequences of such actions may show up. It seems to me that the law of unintended consequences looms large in this arena.

      For these reasons, I would prefer that we start to raise rates sooner rather than later. This may allow us to increase rates more gradually as the data improve rather than face the prospect of a more abrupt increase in rates to catch up with market forces, which could be the outcome of a prolonged delay in our willingness to act.”

    • Fisher 2014: “Some economists have argued that we should accept overshooting our 2 percent inflation target if it results in a lower unemployment rate. Or a more fulsome one as measured by participation in the employment pool or the duration of unemployment. They submit that we can always tighten policy ex post to bring down inflation once this has occurred.

      I would remind them that June’s unemployment rate of 6.1 percent was not a result of a fall in the participation rate and that the median duration of unemployment has been declining. I would remind them, also, that monetary policy is unable to erase structural unemployment caused by skills mismatches or educational shortfalls. More critically, I would remind them of the asymmetry of the economic risks around full employment. The notion that “we can always tighten” if it turns out that the economy is stronger than we thought it would be or that we’ve overshot full employment is dangerous. Tightening monetary policy once we have pushed past sustainable capacity limits has almost always resulted in recession, the last thing we need in the aftermath of the crisis we have just suffered.”

  • 49.
    • Evans 2014: “I believe that the biggest risk we face today is prematurely engineering restrictive monetary conditions. In this scenario, the FOMC could misjudge the presence and magnitude of economic impediments and misread the recent progress we have made as evidence of sounder economic trends. If we were to presume prematurely that the U.S. economy has returned to a more business-as-usual position and reduce monetary accommodation too soon, we could find ourselves in the very uncomfortable position of falling back into the ZLB environment. Such an outcome could be a serious setback to the timely attainment of our dual mandate policy objectives.

      This risk consideration means that the decision to lift the funds rate from zero should be made only when we have a great deal of confidence that growth has enough momentum to reach full employment and that inflation will return to a sustainable 2 percent rate. We should also proceed cautiously and keep the path of rate increases relatively shallow for some time after we begin to raise rates. This approach will allow us time to assess how the economy is performing under less accommodative financial conditions and reduce the odds of overaggressive rate hikes choking off progress toward our policy goals.

      Past experience with the ZLB also counsels this strategy. History has not looked kindly on attempts to prematurely remove monetary accommodation from economies that are in or near a liquidity trap. Three occasions come readily to mind: the Great Depression (which was resolved only with the massive fiscal expansion of World War II), Japan over the past 20 years, and the recent European experience. Indeed, both of the more recent episodes are ongoing today, though Japan finally appears to be making important headway toward raising inflation and eventually exiting the ZLB.

      The U.S., Japanese and European lessons from monetary history strongly suggest that there are great risks to premature liftoff from the ZLB or near-ZLB conditions. Unless the economy is fundamentally strong and the previous impediments to growth have receded sufficiently, the odds remain high that some unforeseen shock could cause the monetary authority to retreat right back into the ZLB.

      And the costs of being mired in the ZLB are simply very large. The ZLB prevents using our very best policy tools to address negative shocks. The ZLB means that interest rates cannot fall low enough to equate the supply of saving with the demand for investment, which, of course, significantly impedes capital formation, future economic growth, and the health of labor markets. And the ZLB often comes hand in hand with undesirably low inflation or even a falling price level, carrying with it the associated costs of debt deflation on the real economy.

      What about the other risk to our policy goals that I mentioned — the risk that the U.S. economy could face pricing pressures that accelerate rapidly and ultimately leave inflation far above our 2 percent target for an unacceptably long period?

      At some point, when the economy has clearly overcome the remaining impediments from the largest economic and financial downturn since the Great Depression, the odds of inflation rising noticeably above target could become palpable. But such a breakout is just not at all very likely today. Indeed, many Fed critics have been voicing this concern since 2009, and it hasn’t even come close to happening.

      What if inflation just ran moderately above target for some time? Well, I see the costs of this outcome as clearly being much smaller than the costs of falling back into the ZLB. First, I believe the U.S. economy could weather the modest increases in interest rates that would be needed to keep inflation in check. Such rate increases would be manageable for the real economy; this is particularly true if industry and labor markets have already made the most difficult reallocations of jobs and overcome other factors so that productive resources are more efficiently and fully employed. Second, as I’ve noted many times in the past, a symmetric inflation target means we should be averaging 2 percent inflation over time. We’ve averaged well under that 2 percent mark for the past six and a half years. With a symmetric inflation target, one could imagine moderately above-target inflation for a limited time as simply the flip side of our recent inflation experience — and hardly an event that would impose great costs on the economy.

      The murky state of inflation expectations is another factor that enters my risk-management considerations. For inflation to take off rapidly, we would have to see a jump in inflationary expectations. But inflationary expectations certainly have not taken off. Indeed, we may be facing a quite different problem.

      Many forecasters — myself included — assume that stable 2 percent inflation expectations will be an important factor helping to pull actual inflation up. Over the past five years, professional forecasters’ projections for long-run inflation have been at the 2 percent target and the Treasury Inflation-Protected Securities (TIPS) break-evens generally have been flat. Yet actual inflation has only just recently made it back up to 1-1/2 percent. Moreover, we still have not seen much at all in the way of higher inflation compensation being built into interest rates or wages. So there is cause for concern that expectations might not produce as strong a pull on inflation as we hope. This unusual situation has precedent, for example, in Japan, where inflation expectations have remained stable, while inflation itself has lagged for a prolonged period. Of course, there is a risk, too, that inflation expectations themselves could fall—indeed, I would note that longer-dated TIPS break-evens have recently dropped to the lower end of their post-crisis range.”

    • Kocherlakota 2014: “I’ve suggested that the FOMC should clarify that it has a symmetric inflation objective, and a two-year horizon for achieving that objective. With those goals, it would be inappropriate for the FOMC to reduce its level of accommodation if its outlook is that inflation will be below 2 percent over the following two years. After all, if the FOMC were to tighten policy in such a situation, it would be deliberately delaying the progress of inflation toward the 2 percent objective. Such an action would weaken the credibility of the FOMC’s stated two-year horizon.

      This conclusion about appropriate monetary policy sheds light on the ongoing public conversation about whether the FOMC should begin targeting a higher range for the fed funds rate sometime in 2015. As you can see from the graph before you, inflation has been low for a long time. Inflation tends to be highly persistent, and so this long stay below target suggests that it will take some time for inflation to get back to 2 percent. Indeed, my benchmark outlook is that PCE inflation will not rise back to 2 percent until 2018. This sluggish inflation outlook implies that, at any FOMC meeting held during 2015, inflation would be expected to be below 2 percent over the following two years. It would be inappropriate for the FOMC to raise the target range for the fed funds rate at any such meeting.

      To be clear: There is uncertainty about the evolution of the inflation outlook, and so this conclusion about the timing of lift-off is necessarily data-dependent. The language changes to the framework statement that I’ve suggested would not tell the public exactly when interest rates are going to rise. But these changes would allow the public to have a better understanding of what kind of data would engender the first interest rate increase.”

  • 50.
    • “It was not until September 2012 that the Fed unveiled a program that finally seemed to help jolt the United States economy to life, with its open-ended pledge to keep buying bonds using newly printed money until the outlook for jobs improved substantially.
      Public pressure on the Fed was, to a startling degree, one-sided. Many conservatives and financial market commentators assailed the central bank for its easy money stance, and there was little in the way of a crusade from the left to try to encourage greater activism by the Fed.” New York Times 2015
    • “The Federal Reserve System (“the Fed”) received a significant amount of pressure from conservatives to reduce its intervention in the economy following its response to the Great Recession, but it received little pressure to increase its efforts to reduce unemployment. The lack of pressure from the organized left was especially notable. There may have been less liberal pressure on the Fed because many liberals believe that fiscal policy is a more effective means of reducing unemployment at the zero lower bound than monetary policy.” Notes from a conversation with Josh Bivens on February 6, 2014
    • “It would be good for unions and advocates for low-income people to be more vocal in calling for the Federal Reserve to aggressively address unemployment. In the past, liberal populists criticized the Federal Reserve for raising interest rates too much during economic prosperity, but today the main critics are on the political right.” Notes from a conversation with Laurence Ball on April 17, 2014
    • “Traditionally, many right-wing think tanks have had monetary policy researchers, but these researchers have generally been driven by ideology, have not produced rigorous research, and have focused on fringe topics, such as the benefits of a gold standard.” Notes from a conversation with Mike Konczal on January 23, 2014
    • Krugman 2014: “The thing is, I know that Janet Yellen, Stan Fischer, and the Fed staff know this — they’re very familiar with recent history and all the relevant economic analysis. So why do they seem to be rhetorically preparing the ground for early rate hikes?
      My guess — and it’s only that — is that they have, maybe without knowing it, been bludgeoned into submission by the constant attacks on easy money. Every day the financial press, many of the blogs, cable financial news, etc, are full of people warning that the Fed’s low-rate policy is distorting markets, building up inflationary pressure, endangering financials stability. Hard-money arguments, no matter how ludicrous, get respectful attention; condemnations of the Fed are constant. If I were a Fed official, I suspect that I would often find myself wishing that the bludgeoning would just stop, at least for a while — and perhaps begin looking for an opportunity to prove that I’m not an inflationary money-printer, that I can take away punchbowls too.
      So my guess is that the Fed, given an improving US job market, is strongly tempted to buy some peace by hiking rates a little, just to quiet the critics for a few months.
      But the objective case for a rate hike just isn’t there. The risks of premature tightening are huge, and should not be taken until we have a truly solid recovery that includes strong wage gains and inflation clearly on track to rise above target. We don’t have any of that, and if the Fed acts nonetheless, it has the makings of tragedy.”
    • But see Duy 2014 reacting to Krugman: “I don’t think that the Fed is reacting to external criticism. What I think is that there are two basic views of the world. In one view, the post-2007 malaise is simply the hangover from a severe financial crisis. Time heals all wounds, including this one, and the recent data suggests such healing is underway. The alternative view is that the economy is suffering from secular secular stagnation similar although not to the same extreme as Japan. The latter view suggests the need for a very low or negative real interest rates to maintain full employment, the former view suggests a fairly significant normalization of monetary policy.
      I believe that the consensus view on the Fed is the former, that the malaise is simply temporary (“a temporary inconvenience”) and now ending. I think this is evident from the Summary of Economic Projections - the implied equilibrium Federal Funds rate is around 3.75%. Perhaps this is below what might have been perceived as normal ten years ago, but the difference could be attributed to slower potential growth rather than secular stagnation.
      If you don’t like that argument, then take the more explicit route. Gavin Davies did the intellectual legwork here so we don’t have to, and catches Vice Chair Stanley Fischer saying that he doesn’t believe the situation calls for protracted negative interest rates. In other words, he rejects the main monetary policy implication of the secular stagnation hypothesis.
      And, I don’t know if Krugman agrees, but I find it hard to believe that Fischer carries anything but extreme intellectual weight within the Fed. So I would hardly be surprised that the Fed would be moving in a direction he defined. One wonders where Fed Chair Janet Yellen’s leadership is on this point? That was always a risk of adding Fischer to the Board - that what might have seemed to be a dream team turned into a power struggle.
      This is not to say that I do not share Krugman’s and Avent’s concerns. I most certainly do. Fischer claims that markets do not believe the secular stagnation story either, but in my mind the flattening of the yield curve is a red flag that the Fed has less room to maneuver than implied by the SEP. But maybe once the Fed actually starts hiking rates, market participants get the clue and the yield curve shifts up. I am not sure I am interested in taking that risk at this point, but no one is asking me to serve on the Federal Reserve Board.”
  • 51.

    Fed Up One Pager

  • 52.

    “The Federal Reserve Act provides that the president of a Federal Reserve Bank shall be the chief executive officer of the Bank, appointed by the board of directors of the Bank, with the approval of the Board of Governors of the Federal Reserve System, for a term of five years.” Federal Reserve Bank Presidents

  • 53.

    “Reserve Bank boards of directors are divided into three classes of three persons each. Class A directors represent the member commercial banks in the District, and most are bankers. Class B and class C directors are selected to represent the public, with due consideration to the interests of agriculture, commerce, industry, services, labor, and consumers. Class A and class B directors are elected by member banks in the District, while class C directors are appointed by the System’s Board of Governors in Washington. All head office directors serve three-year terms. Two directors of each Bank are designated by the Board of Governors as chairman and deputy chairman of their nine-member board for one-year terms.
    Directors cannot be members of Congress, and class B and class C directors cannot be officers, directors, or employees of a bank. Nor can class C directors own stock in a bank. In addition, all class C directors must reside in the District for at least two years before their appointment. Because a Reserve Bank directorship is a form of public service, directors are also expected to avoid participation in partisan political activities.
    For purposes of electing directors, District member banks are grouped by amount of capital into three categories—small, medium, and large. Each group of banks elects one class A and one class B director.” The Structure of the Federal Reserve System Board of Directors

  • 54.
    • Appointment of Reserve Bank Presidents and First Vice Presidents: “Section 4 of the Federal Reserve Act, as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), provides, in part, that “[t]he president shall be the chief executive officer of the bank and shall be appointed by the Class B and Class C directors of the bank ….” Section 4 further provides, in part, that
      “[t]he first vice president of the bank shall be appointed in the same manner and for the same term as the president ” Prior to the Dodd-Frank amendments, the entire Reserve Bank board of directors, including the Class A directors, was responsible for appointing the Reserve Bank president and first vice president.
      Congress has expressly excluded Class A directors from the appointment of Reserve Bank presidents and first vice presidents due to concerns about potential conflicts of interest that could arise from bankers participating in the selection of the leadership of their federal bank supervisor. These potential conflicts of interest are present at many stages of the search and selection process, and accordingly, the Board has
      determined that, in order to comply with the full spirit of the law, Class A directors may not participate in most aspects of the appointment process of Reserve Bank presidents and first vice presidents. This prohibition on involvement in the appointment process means that Class A directors may not (a) be on the search committee for a president or first vice president or take part in its deliberations or the deliberations of the board of directors regarding candidates; or (b) vote for a president or first vice president, including voting on the periodic reappointment of president or first vice president. Class A directors may provide input to members of the search committee regarding particular candidates in the same manner and to the same extent that other bankers outside the System provide such input. Class A directors may also be informed of the appointment of a president or first vice president following Board of Governors’ approval of the appointment and before the appointment is announced publicly.
      Similar potential conflicts of interest are also present for Class B directors who are affiliated with a thrift holding company that is supervised by the Federal Reserve. Accordingly, a Class B director who has such an affiliation may participate in the appointment of the Reserve Bank president or first vice president only to the same extent as a Class A director.”
    • How is a Federal Reserve Bank president selected?: “The process for selecting a Federal Reserve Bank president is set forth in the Federal Reserve Act. Subject to the approval of the Federal Reserve Board of Governors, the president is appointed by the Reserve Bank’s Class B and C directors (those directors who are not affiliated with a supervised entity).”
  • 55.
    • Chappell et al. 2004:
      • pp99-100: “Journalistic accounts of Federal Reserve decision making often portray the chairman as a monetary policy dictator…
        Nevertheless, the need to produce a majority in support of each policy directive suggests that the chairman is unlikely to be a true dictator. On the point, the remarks of Sherman Maisel (1973, 124), a member of the Board of Governors during the Burns era, are instructive:
        ‘While the influence of the Chairman is indeed great, he does not make policy alone. At times he may even feel that his a prisoner of the staff, the other members of the Board, or the Federal Open Market Committee. The limits on his time and energy force him to depend on others for advice and for operations. While any policy he believes in strongly is likely to be adopted in the end, the influence of his colleagues has a great deal to do with its form and timing.’
        Maisel (1973, 110) has subjectively estimated that the chairman has about 45 percent of the policymaking power in monetary policy decisions.”
      • p109: “In each equation, the BURNS coefficient is significantly different from zero at the 0.05 level or better, and the implied voting weight of the chairman (including his contribution to the mean or the median) is approximately 40 to 50 percent. On the basis of these results, we can strongly reject the hypothesis that the impact of the chairman is no different from that of the rank-and-file committee members. The evidence also rejects the view that the chairman is dictatorial. The coefficients on committee mean and median positions are significantly different from zero in all equations, and the implied voting weights are usually larger than the chairman’s.”
      • pp115-116: “By comparing Burns-members policy differences for those who spoke before and after Burns within a meeting, it is possible to gain some insight into the extent of Burns’s persuasive powers…. The coefficient estimate implies that the Burns-member differential is lower by about four basis points when Burns states a preference first, consistent with the hypothesis that the chairman can influence the stated preferences of members.”
      • p117: “Our empirical results substantiate the claim that Burns carried greater policymaking weight than rank-and-file committee members. The estimated voting weight for the chairman (including his contribution to the mean and median positions) is approximately 40 to 50 percent. Additional results show that Burns directly influenced the stated preferences of other committee members. Although we confirm the view that the chairman wields enhanced power, we are also to refute the view that Burns was dictatorial, since median or mean voter positions are also significant in explaining policy outcomes.
      • p120: “Greenspan regularly spoke first in the FOMC meting policy go-round, and at almost every meeting, a majority of voters aligned themselves with the the position he advocated. Because of the near uniformity of Greenspan and median voter preferences, an econometric decomposition of power shares like that describes in chapter 7 for the Burns era is not possible for the Greenspan years.”
      • pgs 128-120: “When Burns chaired the FOMC, he sometimes spoke early in the meetings, and he sometimes waited and spoke after everyone else. His behavior on this matter changed as time passed. Early in his tenure, he tended to speak at the conclusion of a meeting and craft a consensus; late in his tenure, he more frequently spoke first and defined the terms of discussion. As chapter 7 showed, when Burns showed a clear indication of his preference, he did have an important weight in the aggregation of preferences, and he also appeared to sway some other members to alter their own recommendations. It should be surprising that a new chairman would exercise caution early in his term. The formal leadership authority granted the chairman is rather limited and derives more from tradition than stature. A newcomer to the position might grain power in the long term by showing deference to more senior members on arrival.
        At his first meeting, in August 1987, Greenspan also deferred to the committee, permitting others to speak before he did…. Prior to voting, he asked for advice about how to handle preference aggregation, posing this question: ‘I don’t know what the convention is here—whether you average these things [members’ preferred borrowing targets], which you can, or whether you take the majority. What has been the convention?’ (Transcripts, August 18, 1987, 36). Vice Chairman Corrigan advised the chairman against averaging, implying that the majority ruled…. Corrigan’s assessment that the median rather than the mean position was the relevant indicator of committee sentiment appears to have been an accurate one for the Greenspan years. Greenspan and median positions were generally congruent and were also identical to the adopted target. In contrast, the mean position was often different, but when it was, it never prevailed as the committee choice….
        By Greenspan’s third meeting, in November 1987, external events had played a role in changing how he managed the committee. Two weeks earlier, the stock market had crashed and the Dow Jones Industrial Average had plunged 508 points (22.6 percent) in a single day…. At the first regular FOMC meeting after the crash, Greenspan spoke first and at some length, and appeared to be more assertive. With one exception, he always spoke first at subsequent meetings and offered a clear proposal that the committee would ultimately adopt.”
      • p137: “Econometric estimates show that committee members were responsive to the positions advocated by the chairman, even after controlling for macroeconomic conditions. There was little evidence of influence in the reverse direction; leading measures of committee sentiment did not affect proposals made by Greenspan.
        Greenspan initially gained influence by successfully managing policy during a critical period following the 1987 stock market crash. His reputation was further enhanced by a series of good (or fortuitous) decisions that contributed to a prolonged period of growth with declining inflation. His successes earned him respect and support from his colleagues, and as his time on the committee accumulated, he increasingly dominated FOMC deliberations both through intellectual leadership and skillful management of deliberations.”
    • Alan Blinder, who served briefly as vice chair of the Fed, reflected on the Greenspan era in Blinder 2007:
      • “Committees have chairmen, who may dominate the proceedings. This fact is most obvious at the Fed, where it has often been believed—more or less correctly in recent years—that only one vote really matters. On paper, the FOMC was always a pure committee that reached decisions by majority vote. In practice, each member other than Alan Greenspan had only one real choice when the roll was called: whether to go on record as supporting or opposing the chairman’s recommendation, which was certain to prevail.9 It therefore was (and still is) quite possible for the Fed to adopt one policy even though the (unweighted) majority favored another.”
      • “Alan Greenspan chaired the FOMC for over 18 years and was never on the losing side of a vote. Nor did he ever eke out a close victory.”
      • “A particularly clear example came at the February 1994 meeting of the FOMC, when the Fed began a cycle of interest-rate increases by moving the Federal funds rate up 25 basis points. The transcript of that meeting shows that a clear majority of the committee favored raising the funds rate by 50 basis points. Greenspan, however, insisted not just on 25 basis points, but on a unanimous vote for that decision. He got both. Another example arose about two years later. As unemployment fell in the late 1990s, it was widely believed (and amply reported in the media) that the more-dovish chairman was holding back a more more-hawkish majority that wanted to raise rates.”
      • “By contrast, the decisionmaking process of an autocratically-collegial committee may be more like that of a single decisionmaker—in substance, if not in form. FOMC meetings under Greenspan, for example, were highly formal and polite affairs, very much controlled by the chairman. Although alternative views were aired, no one would realistically call what went on “debates.” In both sorts of collegial committees, the danger of group-think is real.
        When it comes to policymaking, however, the leader of even an autocratically- collegial committee is still not in quite as dominant a position as an individual central bank governor—precisely because of the aforementioned tradition of collegiality. The collegiality rubber hits the policy road in at least two places. First, the chairman knows that, if push ever comes to shove, rebellion is always possible if he tries to steamroll his committee into doing something it finds repugnant. As a formal matter, he lacks the de jure authority to force his committee members to accept his position. The strong desire for de facto consensus therefore empowers the rest of the committee to serve as a kind of check on the chairman, who cannot easily pursue extreme policies, follow highly idiosyncratic procedures, or base policy on controversial theories that the rest of the committee does not accept.16
        Second, the desire to maintain the appearance of unity will sometimes force even a dominant chairman to tack in either the hawkish or dovish direction in order to keep wavering committee members on board. Alan Greenspan was about as dominant a chairman as you are ever likely to see. Yet even he occasionally modified his position slightly (I emphasize the word slightly) in order to minimize dissent. He might do so by wording the statement in a way that would placate some potential dissenters. Or he might do so by offering the so-called “bias” as a consolation prize to the losing side. (He sometimes even allowed the committee a free vote on the bias.) Or he might do so by shading his policy recommendation just enough to pick up a wavering voter or two. (Example: by moving the interest rate 25 basis points at the meeting instead of 50, with a presumption that there will be another 25 basis points between meetings.) But whatever his chosen method, Greenspan led the FOMC with a velvet glove, not with an iron fist.”
    • Meade 2005 reports that between 1989 and 1997, “34 percent of non-voters voiced disagreement with Greenspan’s interest rate proposal, as compared with only 28 percent of voters. Using binomial proportions, it is possible to test whether 34 percent is significantly different from 28 percent (the alternative hypothesis) against the null hypothesis that the two percentages are equal.13 The test statistic is 2.14, and the differ- ence in disagreement rates is statistically significant at the 5 percent level. Non-voters were less likely than voters to express disagreement with Greenspan’s bias proposal—44 percent vs. 49 percent, respectively—but this difference is not statistically significant.14
      More striking, however, is the disparity between the disagreement rate based on voiced preferences and the 7.5 percent dissent rate in official votes. In answer to question 3, it is clear that voters frequently advocated one policy but voted for another.”
    • Laurence Meyer, who served as a Governor of the Fed under Greenspan, reflected in Meyer 2004:
      • p50: “The chairman’s disproportionate influence on FOMC decisions, his efforts to build consensus around his policy recommendations before FOMC meetings, and the strong tendency for Committee members to support the majority view – all these were secrets of the temple that I learned at my first FOMC meeting.
        All of this was for a reason. The Chairman, by tradition, is always expected to be on the winning side of the policy vote. Indeed, while it is not written anywhere, the Chairman is expected to resign if the Committee rejects his policy recommendation. For this reason, and since the Chairman also votes first, he prefers to know in advance that he has the support of the majority of the Committee.”
      • p51: “While we may not have always explicitly voiced out support of his policy recommendation at the end of the individual meetings, and later, at the end of the pre-FOMC Monday Board meetings, there was, in my view, an implicit commitment to support the Chairman the next day. Of course, if you were not prepared to support the Chairman at the FOMC meeting the next day, you had the obligation to tell him so at the Monday Board meeting. During my term, no governor dissented in the vote at an FOMC meeting.
        Thus, by the time the Chairman enters the FOMC meeting, he is virtually guaranteed the support of the members of the Board, who are, in turn, the majority of the voting members of the Committee. In my five and a half years on the FOMC, never once did the Chairman fail to secure a vote in favor of his initial recommendation. In fact, within recent memory, there has never been the case of a chairman losing a policy vote at the FOMC.”
      • pp52-53: “WHILE THE CHAIRMAN clearly does wield disproportionate power in the FOMC, he does not necessarily always get his way. It was the Chairman’s responsibility, for example, to count heads to ensure he had a majority supporting him. He might on occasion find himself moving sooner than he would otherwise prefer to ease or tighten in response to the strong consensus within the Committee for such a move. He sometimes would lead by persuading others of the merits of his argument and sometimes perhaps by skillfully adopting as his own view what had become the consensus of the Committee. With a skillful Chairman, as Greenspan certainly is, you never knew whether he had to alter his position to lead the consensus. Indeed, I ended my term not sure I had ever influenced the outcome of an FOMC meeting. This was one of the frustrating aspects of serving on the Greenspan FOMC, but it never stopped me from trying.
        Once the majority view (which, as I’ve already mentioned, is that of the Chairman) is apparent at FOMC meetings, the Committee is expected to rally around it. This means that most votes are unanimous–and when there are dissents, they are typically limited to one or two opposing votes. This is sometimes referred to as a system of “collective responsibility” for decisions, in which the majority view is adopted and supported by the entire body.”
    • Schonhardt-Bailey 2014:
      • 404-407: “In a second camp are three of the same members who spoke disparagingly on transparency—Blinder, Reinhart and Kohn. While none of the three maintain that a decision had been made at the Board of Governors meeting, prior to the FOMC, all three acknowledge that, at least during Greenspan’s tenure, a common stance had generally been achieved at the Board meetings—and Greenspan himself engineered this stance. These three are all either former board governors or staff of the board (largely in contrast to the first group):
        Blinder: [CS-B: Were decisions made before FOMC meetings, perhaps in bi-laterals?] Oh no, [decisions were made] by Alan Greenspan personally. … Taking into account lots of things, including discussions he had with me and other members of the Board but lots of other things. You know, he would make up his mind and he would normally come around on Friday (our [FOMC] meetings were Tuesdays always) and basically tell us, the governors in Washington, but then I learnt, surprisingly, not really tell the presidents. My first vision before getting there was that he was also making twelve phone calls, but I didn’t want to say he made zero but he certainly didn’t make twelve phone calls. But he did make the rounds of the governors and tell them in no uncertain terms what he thought the meeting should decide on Tuesday. That was your chance, by the way, if you wanted to object but not do it in front of the whole committee, to object to him face-to-face. That was his style but I don’t think that is Bernanke’s style.”
      • pp407-415: “If, as Blinder suggests, “the chairman’s going-in position is the likely consensus,” to what extent did other members of the committee feel pressured to adopt the chairman’s position, including being dissuaded from expressing reservations or more significantly, from exercising a dissenting vote?
        To begin, let us first complete Blinder’s depiction of the FOMC as autocratically collegial by drawing upon our interview with him. Blinder characterizes “dissent” as equivalent to defying the chairman, and thereby an action not to be taken lightly. He also pointedly observes that as chairman, Greenspan discouraged debate, but so too did the sequential mode of speaking in the FOMC:
        Blinder: A dissent was viewed as a defiance of, or a slap in the face to the chairman. … Think of the word ‘dissent’. If I go vote Democratic and the Republicans win, no- one says I dissented; I voted differently, but the word is dissent, and in that Greenspan period it became something you did with a great deal of thought knowing that it was defiance of the chairman. …You could disagree with the decision but unless your disagreement was very major, you wouldn’t dissent. Now in terms of expressing [reservations], there was freedom of speech at the FOMC but first of all Greenspan was not encouraging a healthy, robust debate. It was clear that he was not much interested in it, and didn’t really like it very much although he never tried to silence anybody. Secondly, the way it was …orchestrated, [was that] everybody [spoke] in their turn, so … it was never one person involved in a dialogue with another: ‘I think this, you think that, let’s argue our points’. It was around the table, each person in turn reading their script into the microphone. You don’t get a lot of debate. You know, you may hear persons in order, person twelve saying something contradicts person two but person two and person twelve never engage each other, and the chairman of the Fed who is running the meeting, never, when person twelve speaks up, says ‘let’s hear back from person two because you two just disagreed on it’. It almost never happened.
        One of our bank president interviewees, Hoskins, fully endorses Blinder’s depiction of the FOMC as autocratically collegial under Greenspan:
        Hoskins: There was a give and take on policy views but it was limited by the procedure at meetings. You could not respond directly to a statement being made. You raised your hand and got on a list kept by the secretary. I believe members’ views were shaped by others but for most the chairman’s view dominated.
        Poole’s comments also support Blinder’s view, though Poole distinguishes between governors and presidents, with the latter being more likely to express “strong contrary views” than the former:
        Poole: It was actually and still is rare for a member of the Board of Governors to dissent. I guess the only one I remember was actually Ned Gramlich, [who] dissented in June 2003 ….It is quite rare for a member of the Board of Governors to dissent, and by and large, the members of the Board did not express strong contrary views whereas the bank presidents often expressed pretty strong contrary views.
        Other interviewees, however, paint quite a different picture of the constraining nature of both Greenspan as chairman and the institutional environment of the FOMC. Jordan, Broaddus and Minehan all remark that they did not feel constrained in expressing dissenting views in the FOMC.
        Jordan: No [discussion in the FOMC] wasn’t constrained at all. … [Greenspan] would listen to positions taken by governors and presidents, and voting presidents as well as non-voting presidents, and be counting votes as he listened, his recommendation was going to be influenced by what he thought he could get [people] to vote for, and very rarely did I hear him have a tone that said ‘I disagree with all of you and here’s really what I think we ought to be doing’ and try and do that.”
  • 56.
    • Schonhardt-Bailey 2014:
      • pp404-407: “Reinhart: [CS-B: Were decisions made before FOMC meetings, perhaps in bi-laterals?] Sure, under Alan Greenspan it was. Ben Bernanke decided not to. By law the Board of Governors has to consider discount rate requests every two weeks. It is actually a requirement. The Board has a pre-FOMC meeting on the Monday before a meeting which is for staff presentations about the outlook and they have an opportunity to ask questions. That is one reason why the governors don’t necessarily have to talk in public. They can signal to their colleagues by the type of question they ask. A successful governor … and can really signal [his] views, by the tone or the direction of questioning. So there is that mechanism in advance of an FOMC meeting, for the governors anyway. The governors would have a closed session [i.e., with very few or no staff] after the economic briefing to discuss pending discount rate requirements. … Chairman Greenspan, in the latter part of his tenure …would use those Board meetings to make sure all the governors were aligned with his policy recommendation or to adjust his policy recommendation to make sure all the governors were on board. …And so the Board would go in with a better understanding, with a firm understanding of what their colleagues were going to do. …[By Bernanke’s tenure] the pre-meeting board discussion was a source of tension with the bank presidents. Because the Board is the majority of the FOMC most times, and the idea that there would be a pre-meeting meeting was what made them uncomfortable, so board members tried not to convey that they had already had that discussion, but I think Chairman Bernanke basically promised everybody they wouldn’t use that meeting for that purpose.”
      • pp407-415: “Two final observations are relevant to this section, as they allow a comparison between Bernanke’s FOMC, and the committee under Greenspan—and both suggest a fundamental change in the deliberation within the committee:
        Kohn: Ben [Bernanke] has deliberately come in and tried to encourage more discussion on the policy side ….[Moreover, following the economics part of the discussion] we often have a coffee break. [Bernanke] goes into his office by himself, sometimes he will want people to come in to talk–some staff–but mostly by himself. He [returns to offer a summary of the first part of the meeting] …then he always says everybody has said all the good stuff, and I don’t have much to add but, and then he has something interesting to add …. [This is] unlike Greenspan …who would at the end of his little interesting whatever, say ‘And therefore I think we need to raise the interest rate 25 basis points today’. Bernanke doesn’t do that. He says ‘Now I’d be interested in hearing your policy views’. He might lay some issues on the table, particularly in this … quantitative easing unconventional policy period. He would say I would like to hear your views. Now, so he doesn’t lead off …. I think he’s very good, he is a very smart guy, and he’s very good at reasoning through his position but he also listens to people and modifies things a bit around the edges to make people feel better about being in the consensus. So, I think he does a very good job of basically having the committee move when he thinks it should move, although he listens to people and [decides] what he thinks can be modified by what people say …. It’s a different meeting than it was under Greenspan, particularly in the policy part.
        In our interview with him, Blinder also recognizes a significant change in Bernanke’s approach to balancing the “shades of opinion” with the concern for building consensus in the FOMC, when he remarks on greater acceptance of outside speeches by FOMC members, in which they express their views:
        Blinder: Oh definitely [there is a change with Bernanke]. There was much, much less of that in the Greenspan period. There was some but I stood out as an outlier. I was once negatively profiled in Business Week as the ‘leader of the open-mouth committee’ because … you were supposed to be seen and not heard. So there was a little bit of it and you would find it sometimes but there was very little of these outside speeches and press interviews or anything like that; not non-existent but much, much less than today. There has been a huge change in members, and this goes both for governors and for presidents, but especially for presidents, latitude in just singing from their own hymnal book instead of the common hymnal book. There was a lot of peer-group pressure; it wasn’t illegal or anything like that but there was a lot of peer-group pressure not to do that [under Greenspan].”
    • Hilsenrath 2014:
      • “As vice chairwoman of the Federal Reserve, Janet Yellen was an unabashed advocate of easy money who pressed colleagues to embrace her view.
        As chairwoman she has taken a much different approach, becoming a restrained consensus seeker modeled after her predecessor, Ben Bernanke.”
      • “Ms. Yellen’s approach to these issues turns out to be similar to the one investors saw from Mr. Bernanke after the 2008 financial crisis. “She learned a lot from him about consensus-building on the committee and has followed his style,”James Bullard, president of the Federal Reserve Bank of St. Louis, said in an interview in late August.”
      • “Ms. Yellen has been gauging colleagues’ views and seeking common ground among them rather than strong-arming them to agree with her, according to interviews with nearly 20 officials who have worked closely with her.
        A Wall Street Journal analysis of her calendar shows that in her first six months as Fed boss she spent more than 55 hours on phone calls and private meetings with Fed governors and the 12 regional-bank presidents. That contrasts with eight hours spent with private-sector bankers.”
      • “Every Fed leader brings a particular style that shapes how decisions are made. Paul Volcker clashed with Reagan-nominated Fed governors in the 1980s and once threatened to resign if he didn’t get his way on a rate decision. Under Alan Greenspan in the 1990s, Fed officials tended to defer to the leader’s view.
        Mr. Bernanke sought to make the Fed less dominated by its chief. The approach sometimes slowed decision making or led to uncomfortable compromises. Policy hawks pushed back against his easy-money approach, leaving him to weigh how much internal dissent he could bear as he sought untested programs to spur growth.
        Ms. Yellen sometimes served Mr. Bernanke as a counterweight to policy hawks when she was vice chairwoman. Now she has a different role, including a responsibility to get the group to move to unified decisions.”
      • “Because of the uncertainty on how the job market will play out in the months ahead, more Fed officials want to stop offering assurances the Fed will wait a “considerable time” to move on rates.
        Ms. Yellen, in her preparations for Tuesday’s meeting, is looking for an approach on which her colleagues can agree.”
    • Goldman Sachs Research US Daily: Q&A on “Why Renege Now?” (Hatzius) 9-15-2014: “Historically, however, three or even two dissents have been viewed as an embarrassment for the chair, and it is unclear at this early stage of her tenure how much discomfort this would cause Chair Yellen whose style is viewed as very collegial. We do not think that she would be dissuaded from something about which she feels strongly. (Chairman Bernanke, who was also viewed as very collegial, did launch Operation Twist in September 2011 despite three dissents.) But she might look for other ways to persuade possible dissenters to vote with the majority.”
  • 57.
    • Meade 2005 reports that between 1989 and 1997, “34 percent of non-voters voiced disagreement with Greenspan’s interest rate proposal, as compared with only 28 percent of voters…. More striking, however, is the disparity between the disagreement rate based on voiced preferences and the 7.5 percent dissent rate in official votes. In answer to question 3, it is clear that voters frequently advocated one policy but voted for another.”
    • Meyer 2004 pg 52-53: “There are, nevertheless, occasional dissents. Indeed, while most votes are unanimous, one or two dissents are not unusual. A third, however, would be viewed as a sign that the FOMC is in open revolt with the Chairman’s leadership. The dissents, rather than the policy decision itself, would become the story. This would be disruptive to the process of monetary policy-making and unsettling to the financial markets. Because of this, I came to think of the voting process as a game of musical chairs. There were two imaginary red chairs around the table–the “dissent chairs.” The first two FOMC members who sat in those chairs were able to dissent. After that, no one else could follow the same course.

      I never dissented during my term as a governor. I differed on occasion with the Chairman’s recommendation but, after making clear my reservations, joined the consensus. I believe that dissents are an important part of the process. They allow the public to appreciate when the decisions are particularly difficult without undermining the consensus process. This is the case as long as there are no more than one or two dissents. Because I was often visibly identified as someone who disagreed with the Chairman, I believed that my dissents would draw special attention and divert focus from the issues to personalities. So I talked about the issues and, as I said, voted with the consensus.”

    • Schonhardt-Bailey 2014 pp407-415: “Related to his discussion of dissents and the willingness of members to argue their views, Jordan characterizes disagreements and conflict in the FOMC as indirect – that is, rather than challenging their counterparts on the committee, members would instead level their disagreements against the Fed staff:
      Jordan: [With respect to the nature of discussions] there were relatively little, very rare, challenges across the table, of one president or governor to another president or governor. That didn’t happen as a two-person debate that frequently, occasionally but not often. What happened instead …was that you challenged the staff. …They make presentations at the meetings and if you get into a free-wheeling tussle with them over economic ideas, theories, and empirical evidence, and real substance, that is considered fair game, and sometimes what you wanted to do was challenge the position that you thought was just slightly short of nutty as it came up from the staff, and make it clear that you thought it was absolutely ridiculous. So that you would try to, in effect, intimidate your colleagues round the table from venturing close to that wacky idea, you’ve already exposed as something being not very legitimate. …If I wanted to really challenge some idea that I didn’t like or didn’t agree with, or thought that it was heading in the wrong direction or a conclusion that I thought was derived from faulty analysis or empirical evidence, I would go at the staff, and that way I send a message to my colleagues around the table, the voters, what I really believed and I didn’t have to challenge them in a confrontational way across the table if they happened to hold that same wacky view.
      On this notion of indirect conflict, Lindsey concurs with Jordan, adding that as a governor, challenging Fed staff was also a way to manage staff resources:
      Lindsey: I used the opportunity [of challenging the staff] as a way of directing staff resources because the staff reported to the chairman and the best way of getting them to pay attention to you was to take apart one of their numbers at the meeting because there is nothing like embarrassing the staff to get them to behave. … I did it nicely …but believe me I got answers. … I remember there was one time, this was in 1996, where the Fed staff came up with this projection about the future level of corporate profits. …It was a sort of silly consensus view, and I just went through some math. OK, if you assume this, then you have to assume [that], and you assume the other parts of your forecast, if say you’ve got a fixed path and nominal GDP [and] you’ve got an assumed rate of corporate profits, well guess what has to happen to wages? By the way, [wages] would be down if profits are going to go up. … So you would say little things like that and it’s like saying the emperor has no clothes but it’s not something you automatically think of right? But if I wanted to make a point, I’ve always found that was an effective way of making a point.
      Neither Broaddus nor Minehan allude to this type of indirect conflict, but rather remark that disagreements and dissents were not, in their views, highly constrained. Broaddus notes that he dissented six times, “but other people were less willing to use that public signal” than he was and he accounts for this in terms of individual members’ personalities. As a side note, he echoes Poole’s observation that presidents are more likely to dissent than governors, adding that this tendency has increased with the Fed’s move towards greater transparency:
      Broaddus: My point is that the reserve bank presidents now are much more visible to the public then they were and of course their dissents are no longer kept a secret for several weeks as used to be the case. Now they are released immediately so it becomes a powerful tool for a reserve bank president to reinforce and get attention for his point of view. That’s an important, very important, institutional development in the last couple of years I would say. Whether it’s a good thing or not, I don’t know
      Minehan, on the other hand, never dissented but still asserts that she did not feel constrained in expressing her views. Her characterization of the committee as arriving at a consensual decision echoes Blinder’s argument that committees make better decisions but she describes the process more as one of deliberation (argued reasoning) rather than the aggregation of perspectives:
      Minehan: I never felt constrained in giving my views, and although I never dissented I was something of an ‘outlier’ at times. [There are] different reasons that people have for agreeing …. I think the strength of the committee, particularly a committee like the Open Market Committee, [is that] you’ve got every district represented, whether they vote or not, and political people who have been selected in a political process … all sitting around a table bringing [to the discussion] very different backgrounds and very different perspectives and very different thinking. … I think the strength of policy comes from that sort of group being able to argue that yes, for a lot of different reasons this is the course of action to take. Coming in a with a set point of view in that kind of environment I think would just lead to people grandstanding rather than trying to find the right policy course.
      She, like others (e.g., Kohn, Lindsey), believes that the decisions of the FOMC hold greater weight with the markets and with Congress when the committee speaks with a single voice (as represented by the Fed chairman). Even a relatively frequent dissenter like Lindsey (who calculates his own dissent rate at about 10%) comments, that, “you can express your views and you can try persuasion but ultimately, it is right for the Board or the FOMC to express a unitary point of view.”
      In contrast to Jordan, Broaddus and Minehan, is a second group who ascribe to a view of the FOMC as “collegial” but not as “autocratically collegial” as Blinder depicts. For Lindsey, Rivlin, Kohn, Axilrod and Reinhart, the driving force behind the FOMC’s consensual decision making has more to do with institutional features of the Federal Reserve and the FOMC procedures than with the force of the chairman. Lindsey and Rivlin emphasize the importance of the committee arriving at a decision which is then owned by all the committee members, with Lindsey likening the FOMC to a corporate board of directors and Rivlin equating the FOMC to a political cabinet decision:
      Lindsey: When there was [a] possibility that something less than a broad consensus existed, then the chairman definitely smoothed the process before the meeting….[CS- B: In bilateral conversations?] Yes. [CS-B: How did that work?] …If it looked like there were going to be multiple dissents, he would head them off beforehand….The FOMC is not a legislature, it is a board of directors and it functions as such. A board of directors should, by and large, reflect a unitary point of view. That is the only way to run a company. You can have dissents within a board, you can have differences of opinion within a board but as far as the voting goes, the differences should be worked out and because otherwise you have a divided company, and you can’t have a divided company and that’s why I think it’s appropriate to happen that way….The [Bank of England] Monetary Policy Committee is not a board of directors. It has a responsibility that is a subset of all of the operations of the Bank of England whereas the Board of Governors and the FOMC are the governing body [of the Federal Reserve]. There are other sub-committees, I mean it is obviously the FOMC [that] is the one of most interest, but the Board of Governors and even the System itself has a number of sub-committees that do the governance in other areas so, which also tends to operate by a consensus process. So if you are going to have smooth governance, and you are dealing with the same colleagues on a variety of other issues you really have to have an extremely collegial view toward the operations of the decision- making body.
      Rivlin: Well, as to the question [about being constrained] …everybody was very respectful but there was no reticence to express opinions,… so you might get different versions from different people but I did not feel inhibited at all in saying what I thought, although I didn’t have a long history in monetary policy. I came from the fiscal side, and my orientation was to real economic data as to what was happening rather than to theory, and so I was sometimes a little reticent to take on, not with Greenspan, but to take on an argument with say Larry [Meyer] who knew a lot more about the models that I did for example.
      How [the FOMC] worked was that people argued in the meeting and with each other very politely, and very formally, but then when you got to a decision you wanted it to be a consensus decision and when you left the room you didn’t talk about it. …I had come directly from the White House, and when you are in an administration … you argue in a small group around the president. But he makes the decision and you may express your views very forcefully, and some presidents, including Clinton, occasionally set up a debate situation to hear the opposition; he didn’t do that very often but he did it on NAFTA …. Once you got to a decision then nobody went out and said ‘I don’t agree with’ [that]. It was just that you were part of the administration, you were on the team, and you went up to Capitol Hill and defended it, and that was the way the game worked. So coming to the Fed wasn’t that surprising to me. I wanted to be part of it, the group making the decision but I certainly didn’t feel I should get out there and say ‘well, I had a different view’. That was the one place where I felt Greenspan kept pretty tight control, not so much on getting to the decision but on how you talked about it, and he took me to task a couple of times …. I had used the word ‘guess’ in connection with an economic forecast, something like ‘best guesses’ and he said he didn’t think that was a good word because it made it sound too uncertain, too fuzzy, and we weren’t guessing, we were taking all this information and making a decision, so I said ‘yes, that is right, I take your point’ but that kind of thing was normal.
      Rather than viewing consensus decision making as part and parcel of committee members accepting the norm of group accountability (either akin to a corporate board of directors or a government’s administrative cabinet), Kohn, Axilrod and Reinhart adopt a more individualistic view of consensus decision making as a way for individual members to (1) influence the decision of the current meeting’s statement (at the margins) as well as the more substantive decisions of future meetings (Kohn); (2) signal to the chairman their future positions (Axilrod); or (3) tie the hands of future FOMC meetings (a form of pre-commitment device) (Reinhart):
      Kohn: [Compared to UK’s Monetary Policy Committee] in the United States there is a consensus to try and form a consensus and the hurdle for dissenting is higher. I think [that] … because there is that effort to form a consensus, if you’re in that consensus it is possible to help the decision or at least the wording around the decision so you can influence the course of policy over time and market expectations. …Though you don’t dissent [instead you say] ‘Well, I go along with you but I have these reservations, I’d really be more comfortable if the statement said something about worries about inflation’ or something like [that]. The lack of dissent doesn’t mean that people who are uncomfortable don’t have any influence on framing the decision and its explanation to the public …. So it’s a complicated game that happens over time. …
      Axilrod: [Expressing reservations to the proposed policy is] a very good way of guiding the future, of making the chairman uncertain. Chairmen are always uncertain about whether they have got the committee with them or not. It’s very important to them to have the committee with them because their stature, being the main spokesman, the only real spokesman for the Fed, depends on whether they can deliver the committee. So they are constantly caught in-between leading and following. It’s always the case and so some chairmen don’t speak until they have a fairly good idea of the committee….The chairmen constantly worry about getting a positive vote from the committee, and they constantly worry about it not being 7 to 5. …Arthur Burns really didn’t want any dissents and Bill Martin didn’t care as far as I can remember …. Paul [Volcker] was more ambivalent in some ways about that…. The chairmen are not exactly sure [about] these nuances, [although] they are pretty sure of the parameters…. They might get a nuance which says yeah we’re voting for you but we prefer not to tighten or not to ease any more or something like that which gets in the wording here and there, substituting ‘might’ for ‘would’.
      Reinhart: [In the minds of committee members is] the fact that dissent is fairly rare [and] that in all their decisions they think about precedent. Part of it is I think historically the fact that the [membership of the] FOMC rotates each year. The policy decisions span multiple years, particularly when you are using statements to convey longer-term intentions on interest rates and the balance sheets. That makes them want to speak with one voice so that they can in effect try to pre-commit themselves. …Democracy [in the FOMC] has a drawback. You can’t pre-commit future governments …. so a more democratic FOMC has a problem, if you are trying to work on expectations. You can’t pre-commit the next committee, and so unanimity or few dissents is a mechanism to convey the reassurance that the next committee will make decisions in the same manner.”
  • 58.
    Thornton and Wheelock 2014 Figure 2:
  • 59.
    • Thornton and Wheelock 2014: “Table 3 reports the number of dissents for easier and for tighter policy by Reserve Bank presidents and members of the Board of Governors for the entire period from 1936 to 2013. Of 215 dissents by presidents, 35 were for easier policy and 180 were for tighter policy. Presidents accounted for 22 percent of all dissents for easier policy and 72 percent of all dissents for tighter policy. By contrast, of 194 dissents by governors, 125 were for easier policy and 69 were for tighter policy. Governors accounted for 78 percent of dissents for easier policy, but 28 percent of dissents for tighter policy. A statistical test of the hypothesis that the direction of dissents (i.e., for tighter or easier policy) is independent of FOMC member type (governor or president) is easily rejected at conventional levels of significance.”
    • Chappell et al. 2004:
      • Pg 41: “These findings confirm results that have been noted in previous studies of dissent voting patterns and that are readily verified in our sample: governors account for 79 percent of the easy dissents, while Reserve Bank presidents account for 68 percent of the tightness dissents.10”
      • footnote 10: “Previous studies have noted that Reserve Bank presidents, on average, appear to favor a more anti-inflationary policy stance than governors. See Puckett (1984); Woolley (1984); Belden (1989); Laney (1990); Havrilesky and Schweitzer (1990); Havrilesky and Gildea (1991a); Chappell, Havrilesky, and McGregor (1993); and McGregor (1996). Tootell (1991a, 1991b) fails to find significant differences between governors and Reserve Bank presidents; however, he employs a coding procedure that fails to account for the added intensity of preference revealed by dissents.”
    • Gerlach-Kristen and Meade 2011: “First, Board members appear to dissent particularly rarely for tighter policy and to prefer lower interest rates than the average FOMC member. This confirms earlier findings in the literature. Second, dissents have tended to cluster both for the same individual over time and across individuals in the sense that the casting of dissents increases the likelihood of further dissents within a given meeting. These dissents tend to occur in the same direction, rather than in opposite directions. Third, FOMC members are particularly likely to dissent when shorter-term unemployment is high (that is, in situations when monetary policy may be especially effective). This may reflect political economy forces. Fourth, dissents in either direction tend to become rarer as a Chairman’s tenure in office rises. This finding is a general one for the five Chairmen in our sample, and not specific to Chairman Greenspan. Finally, there is evidence that the musical chairs phenomenon reduced the number of dissents for tighter policy under Chairman Greenspan.”
  • 60.
    • Wynne 2013 reviews the recent history of FOMC dissents and offers the following summary:
      “The history of dissenting votes over the past two decades, shown in Chart 2, illustrates three things.

      First, dissenting votes are not uncommon, but in recent years it has been rare for more than one voter to dissent at any one time. The record is three dissenting votes at the August and September 2011 meetings.
      Dissent was a lot more frequent in the early 1990s, with as many as four dissents at one meeting in 1990 and at another meeting in 1992.
      Second, between 2000 and the onset of the financial crisis, dissenting votes were particularly rare. This was the period during which the housing market boomed and some critics argued that the FOMC deviated from its previous rule-like behavior.6 But the record on dissenting votes suggests that there was an unusual degree of consensus among policymakers on the appropriate stance of monetary policy during this period.
      Finally, dissenting votes have become more persistent in recent years. That is, a voter who dissents at one meeting is more likely to dissent at the following meeting. There have been two instances in recent years where a voting member dissented at every single scheduled meeting over the course of a year.”

    • New York Times 2014b: “It is the first time since 2011 that three officials have dissented from a decision of the Federal Open Market Committee, which makes Fed policy, at the same time. As it happens, the same officials dissented on the last occasion, although back in 2011, all three wanted the Fed to retreat from its stimulus campaign. Mr. Kocherlakota has since changed his mind.
      Such a high level of dissent is unusual — before 2011, it last happened in 1992 — because the Fed aims to set policy by consensus. It tries to shape expectations about its future conduct, and dissents tend to undermine confidence that the Fed will follow through.”
  • 61.

    Covering the period 1978-2000, Meade and Sheets 2005 report:

    • “For a dissenting voter, meeting minutes generally indicate the reasons for the dissent, from which it is possible to discern the dissenter’s desired policy stance relative to the majority. Of the 198 dissents registered in our sample (out of 2403 votes cast),6 exactly two-thirds or 132 votes were dissents for tighter monetary policy while one-third or 66 votes were dissents for easier monetary policy. Notably, dissenting votes cast by Board members were split about evenly between dissents in favor of easing and dissents in favor of tightening. Bank presidents dissented for tighter policy six times more frequently than they dissented for easier policy.”
    • “FOMC voters dissenting in favor of easier monetary policy had regional unemployment that was above the national rate by an average 0.5 percentage point. A t-test strongly rejects the null hypothesis that the mean difference in regional and national unemployment rates for these voters is equal to the mean difference for all votes cast. Notably, when the unemployment rate in a member’s region was more than 1.5 percentage points below the national average, the member dissented for easier policy just 1.3% of the time. In contrast, when the unemployment rate in a member’s region was more than 1.5 percentage points above the national average, the member dissented for monetary easing 9.9% of the time.
      FOMC voters dissenting in favor of tighter policy had lower regional (relative to national) unemployment rates; the mean difference was 0.7 percentage point. A t-test strongly rejects the null hypothesis that the mean difference in unemployment rates for these voters is equal to the mean difference for all votes cast. The details of these results are roughly symmetric to those discussed in the previous paragraph. In those instances when the unemployment rate in a member’s region was below the national average, the member dissented in favor of tightening 7.5% of the time but dissented in favor of easier policy only 1.6% of the time. Conversely, no member dissented in favor of tighter policy when his region’s unemployment rate was more than 1.5 percentage points above the national average. However, when the unemployment rate in a member’s region was more than 1.5 percentage points below the national average, he dissented in favor of tighter policy 9.8% of the time.”
    • “The estimated coefficient on the regional variable UNDIFF is negative and highly statistically significant. This result indicates that a rise in the regional unemployment rate of the voter (for a given national rate) raises the likelihood of an easing dissent and reduces the likelihood of a tightening dissent.12 The significant, negative coefficient on the BOARD variable indicates that Board members are more likely than Bank presidents to dissent for easier policy and less likely than Bank presidents to dissent for tighter policy. This result is consistent with the general finding in the FOMC voting literature that Bank presidents tend to be more hawkish than Board members.”
    • “For the final equation, membership on the Fed’s Board reduces the probability of dissenting for tighter monetary policy by 4.2 percentage points and increases the likelihood of agreement with the majority or dissenting for easier policy by 2.4 and 1.8 percentage points, respectively. At a face-to-face meeting of the FOMC, members are much more likely to register a tightening dissent and much less likely to register an easing dissent (2.1 and 1.6 percentage points, respectively) than during a conference call. An increase of one percentage point in a region’s unemployment rate relative to the national rate reduces the probability that a voter from that region will dissent for tightening by 2.4 percentage points.”
  • 62.

    Chappell et al. 2004:

    • 100-101: “Despite occasional disagreements, it is apparent that the FOMC values consensus…. After a close seven to five vote in favor of the first proposed directive, Burns reacted as follows:
      ‘Well, let’s stop and deliberate it. I think that would be a very unfortunate vote. To me the Committee is split badly. It would mean that this would excite a great deal of discussion that would not bring honor or credit to the Committee and therefore I think we must seek to accommodate one another. I didn’t think our differences were that large. Let’s try again. Does anyone have a proposal to make, one of the dissenters?’ (Transcripts, September 20, 1977, tape 8, 16-17)”
    • 101: “The need to gain majority support limits the power of the chairman; however the presence of ethic favoring the achievement of consensus might accentuate it. If members are reluctant to challenge proposals offered by an agenda-setting chairman, then he should be able to tilt outcomes toward his favored positions.”
    • 111: “[C]oefficients of the mean positions of governors and bank presidents and significantly different from zero, so both groups have an impact on outcomes. Assessing whether governors and bank presidents have differential power is slightly complicated by the fact that the groups are typically not the same size… [T]he equal power restrictions cannot be rejected, although the power of the test to discern such differences appears to be low.”
    • p117: “Our empirical results substantiate the claim that Burns carried greater policymaking weight than rank-and-file committee members. The estimated voting weight for the chairman (including his contribution to the mean and median positions) is approximately 40 to 50 percent. Additional results show that Burns directly influenced the stated preferences of other committee members. Although we confirm the view that the chairman wields enhanced power, we are also to refute the view that Burns was dictatorial, since median or mean voter positions are also significant in explaining policy outcomes. Neither the mean nor the median voter position is a clearly preferable indicator of committee sentiment, suggesting that both majoritarian and consensual pressures may be important. We also find that nonvoting bank presidents had no influence over outcomes, and detect no significant differences in the power of governors and voting bank presidents. Finally, we find support for the Blinder hypothesis, which we interpret to imply that committee decisions exhibit more inertia than would be expected based on aggregation of individual preferences alone.”
  • 63.

    Chappell et al. 2004:

    • p120: “Greenspan regularly spoke first in the FOMC meting policy go-round, and at almost every meeting, a majority of voters aligned themselves with the the position he advocated. Because of the near uniformity of Greenspan and median voter preferences, an econometric decomposition of power shares like that describes in chapter 7 for the Burns era is not possible for the Greenspan years.”
    • pgs 128-120: “When Burns chaired the FOMC, he sometimes spoke early in the meetings, and he sometimes waited and spoke after everyone else. His behavior on this matter changed as time passed. Early in his tenure, he tended to speak at the conclusion of a meeting and craft a consensus; late in his tenure, he more frequently spoke first and defined the terms of discussion. As chapter 7 showed, when Burns showed a clear indication of his preference, he did have an important weight in the aggregation of preferences, and he also appeared to sway some other members to alter their own recommendations. It should be surprising that a new chairman would exercise caution early in his term. The formal leadership authority granted the chairman is rather limited and derives more from tradition than stature. A newcomer to the position might grain power in the long term by showing deference to more senior members on arrival.
      At his first meeting, in August 1987, Greenspan also deferred to the committee, permitting others to speak before he did…. Prior to voting, he asked for advice about how to handle preference aggregation, posing this question: ‘I don’t know what the convention is here—whether you average these things [members’ preferred borrowing targets], which you can, or whether you take the majority. What has been the convention?’ (Transcripts, August 18, 1987, 36). Vice Chairman Corrigan advised the chairman against averaging, implying that the majority ruled…. Corrigan’s assessment that the median rather than the mean position was the relevant indicator of committee sentiment appears to have been an accurate one for the Greenspan years. Greenspan and median positions were generally congruent and were also identical to the adopted target. In contrast, the mean position was often different, but when it was, it never prevailed as the committee choice….
      By Greenspan’s third meeting, in November 1987, external events had played a role in changing how he managed the committee. Two weeks earlier, the stock market had crashed and the Dow Jones Industrial Average had plunged 508 points (22.6 percent) in a single day…. At the first regular FOMC meeting after the crash, Greenspan spoke first and at some length, and appeared to be more assertive. With one exception, he always spoke first at subsequent meetings and offered a clear proposal that the committee would ultimately adopt.”
    • p137: “Econometric estimates show that committee members were responsive to the positions advocated by the chairman, even after controlling for macroeconomic conditions. There was little evidence of influence in the reverse direction; leading measures of committee sentiment did not affect proposals made by Greenspan.
      Greenspan initially gained influence by successfully managing policy during a critical period following the 1987 stock market crash. His reputation was further enhanced by a series of good (or fortuitous) decisions that contributed to a prolonged period of growth with declining inflation. His successes earned him respect and support from his colleagues, and as his time on the committee accumulated, he increasingly dominated FOMC deliberations both through intellectual leadership and skillful management of deliberations.”
  • 64.

    Riboni and Ruge-Murcia 2010:

    • “For the United States, we study a sample from February 1970 to February 1978 and another one from August 1988 to January 2007. The first sample corresponds to the chairmanship of Arthur Burns, and the second one corresponds to the chairmanship of Alan Greenspan (with a small number of observations from the chairmanship of Ben Bernanke).”
    • “To our knowledge, all existing studies that estimate interest rate rules abstract from the vot- ing process that lead to policy decisions. A large body of anecdotal evidence hints instead at the importance of strategic considerations in the decision-making process. Committee members di er along various dimensions and, consequently, are likely to have different preferred interest rates. The way committees resolve these differences crucially depends on the particular voting protocol (implicitly or explicitly) adopted. In this paper, we consider three voting protocols that capture some relevant aspects of the actual monetary policy making by committee: the consensus, the agenda-setting and the simple-majority models. The three protocols have distinct time series implications for the nominal interest rate. These different implications are the basis for empirically distinguish among the three protocols using actual data from the policy decisions by committees in five central banks. A robust empirical conclusion is that the consensus model is statistically superior to the other two voting protocols. This result is observed despite the fact that all central banks (except the Bank of Canada) considered in our sample do not formally operate under a consensus (or super-majority) rule. This result is consistent with a large experimental literature on committee decision making that indicates a preference for oversized or nearly unanimous coalitions even in strict-majority rule games.”
  • 65.

    Chappell et al. 2004:

    • p100: “Although bank presidents attend all FOMC meetings, they do not always serve as voting members. This invites the question of whether they have any influence on policy choices while serving in nonvoting capacity. Although Burns specifically referred to views of nonvoting bank presidents in crafting a directive on at least one occasion (Memorandum, January 11, 1972, 95), it seems that in other instances only the views of the voting members were considered.”
    • p111: “The results indicate that nonvoting alternates have no appreciable influence over policy outcomes. In all cases, measure of mean and median positions including the alternates are dominated by those including voting members only; none of the variables measuring alternate preferences has a coefficient significantly different from zero. If policy-making in the FOMC is consensual, that consensus does not appear to encompass the views of nonvoting members.”
  • 66.

    Goldman Sachs Research US Daily: Q&A on “Why Renege Now?” (Hatzius) 9-15-2014: “Q: Can the hawks force a change?
    A: Technically no. Given the tradition of Fed governors and the New York Fed president voting with the chair, as well as the fact that Minneapolis Fed President Narayana Kocherlakota is currently the most dovish member of the committee, the maximum number of dissents is three (out of ten voters at present). Moreover, our guess would be that the new Cleveland Fed President, Loretta Mester, would not dissent against unchanged guidance despite her discomfort with it (but this is only a guess based on one recent speech).
    Historically, however, three or even two dissents have been viewed as an embarrassment for the chair, and it is unclear at this early stage of her tenure how much discomfort this would cause Chair Yellen whose style is viewed as very collegial. We do not think that she would be dissuaded from something about which she feels strongly. (Chairman Bernanke, who was also viewed as very collegial, did launch Operation Twist in September 2011 despite three dissents.) But she might look for other ways to persuade possible dissenters to vote with the majority.”

  • 67.

    Meyer 2004: “As for myself, I was too consumed with questions about the NAIRU and productivity to worry much about the election. Of course, I may be somewhat politically naïve. As proof of this, it was in September 1996, in advance of the FOMC meeting immediately preceding the election, that Janet Yellen and I chose to visit the Chairman in his office and urge him to recommend that the FOMC tighten rates. We both said that we would not be able to support the Chairman much longer if he didn’t recommend a move. It was not an ultimatum, but it was a message that our patience was running out.”

  • 68.

    Schonhardt-Bailey 2014 p425-428: “None of our FOMC interviewees were surprised that we found no evidence in the transcripts to suggest that members were cognizant of political pressures on the Federal Reserve, but they offered different reasons for this. One group argues strongly that because the Fed really is independent of politics, FOMC members behave accordingly [Hoskins]. Part of this behaviour may, however, reflect (1) norms of etiquette within the FOMC meeting (Blinder); (2) that political pressure—should it exist—would be more likely to be felt by the Fed chairman, outside the FOMC meeting itself (Broaddus); or (3) that politicians are sometimes tempted to exert pressure on the Fed, but dissuaded by their advisors (Rivlin). And, Minehan notes that where monetary policy intersected with fiscal policy, political considerations may have influenced the discussion—but perhaps not to the extent that our textual analysis captured this.
    Hoskins: Members believe that the Fed is independent of politics and tend to behave that way. Some members may have tempered their statements with political considerations in mind, particularly when political critics were aggressively outspoken. They did this not to help a party but to protect the independence of the Fed. …The lack of discussion at meetings about political pressure is because there was rarely any direct pressure put on members by political agents.
    Blinder: One of the things that I found most gratifying when I went from an outsider to an insider is that what I thought might be part-myth about the apolitical technocratic nature of Federal Reserve decision-making was more or less correct. It is very non-political so it is not just that it’s not polite to say these things and you don’t want to put them on the tape, but people for the most part really felt that way, that politics should not enter the room. … Talking political was like slurping your soup. It was just very impolite; you weren’t supposed to do it. Even if you had political thoughts, you were not supposed to voice them.
    Broaddus: [Political influence] was never very prominent in my view, and I think this one of the great strengths of the Fed. Keep in mind that I wasn’t the chairman. Obviously, the chairman is in contact with the political authorities. The treasury secretary, you know, typically meets with the Fed chairman once a week so he’s fairly exposed to those kinds of pressures to a far greater degree than a reserve bank president like me would have been….. I never experienced that and I didn’t sense it.
    Rivlin: No, you didn’t even think about [political influence]. The culture of the Fed was ‘we don’t do that; we do what is right for the economy’…. I never saw this in the Fed at all, [but] I did see it in the other side because I was in the Clinton administration in 1994 when the Fed was raising rates. …They were worried about inflation creeping up and so they raised rates in 1994 quite aggressively and Clinton was upset about it. He thought they are going to derail our recovery. …In the meetings in the White House, people like me and Alan Blinder, and others, Laura Tyson, the economists, were saying ‘Mr. President, don’t say anything’. He wanted to talk about it, he wanted to say this is bad, go out publicly and we were saying ‘no, no, that is not a good idea’, and he didn’t. …We certainly thought it was inappropriate for a president but also that it might even backfire and that we had better let the Fed do its thing. But that is the only time I ever encountered that issue, [and] that was from the other side.
    Minehan: Frankly, we never talked about that…. The minutes correctly reflect the fact that we took it as a matter of obligation that we voted on the basis of our understanding of the economics, and not the political cycle, so you know I have always wondered about this extreme focus on ‘you can’t do this because this is happening in Congress, you can’t do that because that is happening, an election, and this and that’. We just did not talk about that….unless of course it was something that had both economic and political implications, you know, the fiscal deficit issues that clearly has both economic [and political implications]. If the Congress is really going to tighten fiscal policy, well, monetary policy has to take account of it and vice versa.
    Broaddus adds a further, more nuanced, observation on measuring the influence of political pressure on the Federal Reserve, which points to the limitations of models which fail to consider the actual decision making process (and conversely, illustrates the value in adding contextual insights from interviews to textual data analysis). He argues that FOMC members (particularly prior to the emergence of the low inflation consensus) may have behaved as though they were following the political business cycle, when in fact this was not at all their intention:
    Broaddus: The individual members of the FOMC might have behaved in a way that is consistent with a political-business cycle simply because that’s the way they view the proper function of monetary policy, you know, resisting weakening of the economy. Although … we have a consensus now [which] I think it’s pretty strong, that the Fed’s principal objective is price stability, despite the dual mandate, mainly because that’s the way you get both of the mandates met. But that was not always the case. ….[In the earlier period, when credibility was not a consensus.] … there were people who were much more interested in fine-tuning the economy, and actively, we called it ‘activist policy’—[i.e.,] reacting to what was happening currently and maybe in the expected near-term future and letting that be the main driver for their monetary policy preferences. I can imagine that people in that group would behave in way that might make it look like they were responding to political pressures when they weren’t actually doing that.
    Others place a greater weight on the role of politics, but predominantly at the level of the Fed chairman—and only during the Burns (and possibly Martin) chairmanships. Hoskins, Blinder and Lindsey comment that during these previous chairs, the Fed was more influenced by politics. Hoskins notes simply that “in earlier days, two Fed Chairmen did react directly to the president. Martin and Burns.” Blinder characterizes monetary policy in this earlier period as more partisan (though also notes its possible resurgence in the aftermath of the financial crisis). He remarks that “the old-fashioned Republican-Democrat division” in terms of emphasis on inflation versus unemployment “may be coming back now”. But,
    Blinder: … if you look historically, the Republican Party and its predecessors going back to the Federalists in America were much more anti-inflation and much less worried about ‘full employment’. We didn’t have that phrase back in the old, old days, you know, and the Democrats [were] conversely much less worried about inflation if not indeed at some periods of time favouring inflation, and much more worried about growth and employment. That ended around Reagan, and there ceased being a political difference on the short-run trade-off between inflation and unemployment around Reagan’s time. As to the political-business cycle, as to trying to juice up the economy before an election, other than the Fed under Arthur Burns, … the Fed just didn’t do that.
    Lindsey explains that “it was the Carter experience that really galvanized the Board and created its political independence, because Carter and his manipulation of monetary policy was such a disaster. [Hence] the Board was able to assert itself as independent of the political institutions.””

  • 69.

    Meyer 2004:

    • pg 85-86: “The Clinton and George W. Bush administrations, during the time I was on the Board, were extremely respectful of the independence of the Fed. There were no occasions, to my knowledge, of any pressure put on the Fed to alter its own assessment of the appropriate course for monetary policy.
      Members of the Congress, on the other hand, often commented publicly on monetary policy and sometimes wrote letters to the Board. Such letters virtually always recommended that the FOMC either refrain from tightening or ease rates. I cannot recall an instance during my tenure, in fact, when anyone in Congress asked the FOMC to tighten policy! … Still, the Congress respects the operational independence of the Fed. This does effectively insulate the conduct of monetary policy from political interference.”
    • pg 175: “The media were not the only source of critical comments, however. The mail began to turn ugly as well. Governors do not get much mail from the public, but I will never forget a piece I received at about this time. It was a postcard, with barely readable pink scribbling. It began: “Dear Spawn of Satan.”
      I quickly established that this was not “fan” mail. It went on to complain—in surprisingly well-reasoned terms—about the trauma of the bursting of the equity bubble and the Fed’s role in inflicting this trauma.”
  • 70.

    See, e.g., Drazen 2001, for an overview of the literature.

  • 71.

    Drazen 2001:

    • “It is over a decade since Alesina’s paper was published. It now seems like a good time to look at the past twenty-five years of work and to evaluate the state of the literature. What is our current state of under-standing of the PBC, both theoretically and empirically? On what points is there agreement and on what points is there still significant disagree- ment? How well do the models explain the data? What does existing theory as well as data suggest about directions for future research?
      The short answer to these questions is that we have learned quite a bit, with agreement on a number of issues, but still significant disagreement on others. On the empirical side, there are a number of clear electoral effects on macroeconomic variables. However, at least for the opportunistic model in developed countries, there is much less hard evidence than both the theoretical models and the conventional wisdom about the prevalence of “election-year economics” would suggest. Although there is wide (but not universal) agreement that aggregate economic conditions affect election outcomes in the United States, there is significant disagreement about whether there is opportunistic manipulation that can be observed in the macro data. There is a clear partisan effect in the United States (as well as in some other countries), with economic activity being lower in the first part of Republican than Democratic administrations, but still disagreement about the underlying driving mechanisms.”
    • “Numerous econometric tests provide little support for the political cycle in economic activity predicted by the Nordhaus model. Studies for the United States began with McCallum’s (1978) study of unemployment fluctuations before elections. Alt and Chrystal (1983) summarize early empirical studies as showing a striking lack of support, a point reinforced by results summarized in Alesina, Roubini, and Cohen (1997). Faust and Irons (1999), using more sophisticated techniques, come to a similar conclusion. Figure 1, showing mean rates of GNP growth (seasonally adjusted) by quarter of the president’s term in the United States from 1948 to 1998, illustrates the point.9
      Similarly, no evidence was found in developed economies outside the United States for a Nordhaus-style PBC for unemployment or economic growth (Paldam, 1979; Lewis-Beck, 1988). Alesina, Roubini, and Cohen (1997) reject an opportunistic cycle in real activity for a sample of 18 OECD countries over the period 1960-1993.10
      We summarize the general consensus that the opportunistic PBC receives little support in the pre-electoral behavior of GNP or unemployment as:
      REGULARITY 2: There is no significant increase in aggregate economic activity prior to elections in either the United States or other OECD countries.”
    • “The postelectoral increase in inflation predicted by the Nordhaus model receives support in some countries and not in others. Alesina, Cohen, and Roubini (1992) and Alesina, Roubini, and Cohen (1997) test for a political cycle in inflation (measured as the growth rate of the CPI over the previous 4 quarters), using the same data set and methodology they used for GNP growth, and defining a political dummy equal to 1 in the election quarter and in the 3 quarters following the election, and 0 other- wise. In a pooled cross-section, time-series regression, they find a highly significant coefficient of the correct sign on the political dummy; in the individual country regressions, they find the coefficient is of the correct sign in almost all the regressions, and significant at the 10% or higher level for Denmark, France, Germany, Italy, and New Zealand. Overall, they conclude the PBC effect on inflation is widespread across OECD countries (on the basis of their pooled regression) and on a much stronger empirical footing than the effect on GNP and unemployment.
      The evidence for the United States is less clear. In similar tests to those described above, Alesina, Roubini, and Cohen (1997) reject the existence of a postelectoral surge in inflation over the period 1947-1994. However, the behavior of inflation after elections changed over this sample period. After 1979 there is no evidence of a political inflation cycle, which corresponds to the timing of the change in Federal Reserve policy rules in 1979. (See, for example, the estimated policy rules in Clarida, Gali, and Gertler, 2000.) Prior to this however, there is more evidence of a possible postelectoral increase in inflation. This is consistent with other studies, and is illustrated in Figures 2 and 3, showing mean annualized CPI inflation (seasonally adjusted) from 1960 to 1979 vs. 1979 to 1998 by quarter of the president’s term. (A graph for 1948-1979 looks very similar to 1960-1979, but the latter is used for better comparability with later figures.)
      To summarize:
      REGULARITY 3: In many OECD countries there is a clear post electoral increase in inflation. In the United States, there is evidence of such a post electoral increase ininflationpriorto1979, but no evidence thereafter. ”
    • “For the United States, the sensitivity of the inflation results to the time period considered is seen in money growth rates as well. Alesina, Cohen, and Roubini (1992) find only very weak evidence of a political monetary cycle in the postwar period, a conclusion reinforced in Alesina, Roubini, and Cohen (1997) for the period 1949-1994. In contrast, Grier (1989) and Beck (1987) both find significant support for an office-motivated model of monetary policy in the United States over the subperiod 1960-1980. Grier, using U.S. quarterly data from 1961 to 1982, regresses M1 growth on its previous value, the full-employment deficit, and a political dummy specified as a fifteen-quarter second-degree polynomial distributed lag on a dummy which takes a value of one in the election quarter and zero otherwise. (The polynomial distributed lag is chosen to conserve on degrees of freedom.) He finds that the timing of an election significantly influences money growth, even when fluctuations in output, interest rates, and the deficit are held constant. Beck (1987) also finds a political cycle in the money supply in the United States over the same period. Figures 4 and 5 present mean M1 growth rates (seasonally adjusted) by quarter of the president’s term over the periods 1960-1979 and 1979-1998. Interestingly, Beck finds no similar cycle in monetary instruments, such as reserves or the federal funds rate, a point made clear in Figure 6, giving the mean federal funds rate by quarter of term from 1959 to 1998. The difference in results for the behavior of money growth and instruments of monetary control will be central to our model of the PBC presented below. We summarize these results as:
      REGULARITY 4: There is evidence of a pre-electoral increase in money growth rates in many countries. In the United States, there is a pre-electoral effect from 1960 to 1980, but none thereafter. There is no evidence for the United States of an electoral cycle in the federal funds rate.”
  • 72.
    • Schonhardt-Bailey 2014: p425-428: “Broaddus adds a further, more nuanced, observation on measuring the influence of political pressure on the Federal Reserve, which points to the limitations of models which fail to consider the actual decision making process (and conversely, illustrates the value in adding contextual insights from interviews to textual data analysis). He argues that FOMC members (particularly prior to the emergence of the low inflation consensus) may have behaved as though they were following the political business cycle, when in fact this was not at all their intention:
      Broaddus: The individual members of the FOMC might have behaved in a way that is consistent with a political-business cycle simply because that’s the way they view the proper function of monetary policy, you know, resisting weakening of the economy. Although … we have a consensus now [which] I think it’s pretty strong, that the Fed’s principal objective is price stability, despite the dual mandate, mainly because that’s the way you get both of the mandates met. But that was not always the case. ….[In the earlier period, when credibility was not a consensus.] … there were people who were much more interested in fine-tuning the economy, and actively, we called it ‘activist policy’—[i.e.,] reacting to what was happening currently and maybe in the expected near-term future and letting that be the main driver for their monetary policy preferences. I can imagine that people in that group would behave in way that might make it look like they were responding to political pressures when they weren’t actually doing that.
      Others place a greater weight on the role of politics, but predominantly at the level of the Fed chairman—and only during the Burns (and possibly Martin) chairmanships. Hoskins, Blinder and Lindsey comment that during these previous chairs, the Fed was more influenced by politics. Hoskins notes simply that “in earlier days, two Fed Chairmen did react directly to the president. Martin and Burns.” Blinder characterizes monetary policy in this earlier period as more partisan (though also notes its possible resurgence in the aftermath of the financial crisis). He remarks that “the old-fashioned Republican-Democrat division” in terms of emphasis on inflation versus unemployment “may be coming back now”. But,
      Blinder: … if you look historically, the Republican Party and its predecessors going back to the Federalists in America were much more anti-inflation and much less worried about ‘full employment’. We didn’t have that phrase back in the old, old days, you know, and the Democrats [were] conversely much less worried about inflation if not indeed at some periods of time favouring inflation, and much more worried about growth and employment. That ended around Reagan, and there ceased being a political difference on the short-run trade-off between inflation and unemployment around Reagan’s time. As to the political-business cycle, as to trying to juice up the economy before an election, other than the Fed under Arthur Burns, … the Fed just didn’t do that.
      Lindsey explains that “it was the Carter experience that really galvanized the Board and created its political independence, because Carter and his manipulation of monetary policy was such a disaster. [Hence] the Board was able to assert itself as independent of the political institutions.””
    • The most frequently cited case of a Fed chair following the “political business cycle” is Arthur Burns. Meltzer 2010 reports: “8 In the 1960s, Burns criticized the use of wage-price guideposts. In office, he became the leading proponent. Eventually, President Nixon imposed price and wage controls for political reasons. The Democrats in Congress authorized him to use controls. He believed they would criticize his failure to use them in the 1972 election. Burns participated in the meeting at Camp David in August 1971 at which the president prepared for a 90-day price and wage freeze and an end to convertibility of the dollar into gold. Why was the chairman of the independent Federal Reserve at a meeting to decide on economic policy to prepare for the 1972 election?
      Burns answered the question in a meeting with the president recorded on President Nixon’ s tapes. Burns said:
      “I am a dedicated man to serve the health and strength of our national economy, and I have done everything in my power, as I see it, to help you as president, your reputation and standing in American life and history. … I want you to know this … the moment a conflict arises, I’m going to be right here. I’ll tell you about it, and we’ll talk it out and try to decide together where to go next.” (Quoted in Meltzer, 2010, Book 1, 635).
      During the fall of 1971, the president urged Burns repeatedly to increase money growth. Burns never said, yes I will. The closest he came was to tell the president that he would not repeat the Federal Reserve’s 1960 monetary restriction. Money growth rose in 1972. All the remaining members of the Board of Governors had been appointed by Presidents Kennedy and Johnson. They had no desire to help President Nixon’s re-election. They voted for the policy to reduce the unemployment rate. Burns shared their concern about unemployment, and President Nixon said that no election was lost because of inflation. He said repeatedly that he lost the close 1960 election to Kennedy because unemployment rose in October 1960.
      Federal Reserve actions in 1972 helped to lower the unemployment rate before the election. Burns acted for political reasons and from a desire to lower the unemployment rate for reasons he believed were consistent with increased economic welfare.
      After President Carter did not reappoint Burns, Burns gave the Per Jacobson lecture at the 1979 IMF meeting in Belgrade. His speech, “The Agony of a Central Banker” contained this explanation of his actions as chairman and a message for economists who disregard political influence on policy decisions.
      “Viewed in the abstract, the Federal Reserve had the power to abort the inflation at its incipient stage fifteen years ago [1964] or at any later point, and it has the power to end it today [1979]. At any time within that period, it could have restricted the money supply and created sufficient strains in financial and industrial markets to terminate inflation with little delay. It did not do so because the Federal Reserve was itself caught up in the philosophic and political currents that were transforming American life and culture” (Quoted in Meltzer, 2010, Book 1, 676. Emphasis added.)”
  • 73.

    See, e.g., Greider 1987 and Chappell et al. 2004.

  • 74.
    • Greider 1987 pages 106-112: “The chairman would actually have been content himself not to change anything fundamental, but simply to push forward with the Fed’s orthodox approach—tightening credit by pushing interest rates up sharply. But the chairman faced an internal political dilemma: members like Coldwell and Wallich were willing, even eager, to drive up interest rates and halt the inflationary spiral. But others like Partee and Teeters and Rice were much more hesitant to vote directly for such drastic action. …
      “We could have just tightened,” Volcker acknowledged, “but I probably would have had trouble getting policy as much tighter as it needed to be. I could have lived with a more orthodox tightening, but I saw some value in just changing the parameters of the way we did things.” …
      As a Reserve Bank president explained:
      “Everyone could say: “Look, no hands.” It was easier to do this with a self-imposed semiautomatic rule that it would be with periodic decisions by the committee. It wasn’t just the perception of outside pressures, but also inside pressures. Internally, nobody really knew how much tightening would be needed to break inflation or how far interest rates would really have to go.”

      As Volcker made the rounds with his other colleagues, his political dilemma was resolved: the three governors who had been most hesitant about drastic action on interest rates were much more receptive to his proposal. Wallich and Coldwell didn’t like it, but Teeters, Rice and Partee were willing to make the shift, well aware that it meant a sharp spike in interest rates—the action they had been reluctant to take directly.
      “Under the new system,” Nancy Teeters observed, “we could say that what we were doing was concentrating on the monetary aggregates. It was perfectly obvious to me that if you set the monetary growth too low, that would send interest rates up. That was never in doubt. The problem with targeting the Fed Funds rate is that you had to set it. This did let us step back a bit.”
      Emmett Rice, who had joined the board four months earlier, … also recognized the political cover that the new operating system offered the governors:
      “This meant that you were not directly responsible for what happened to interest rates. This was one of the advantages. If interest rates had to go to 20 percent—and I have to say that nobody thought they would go that high—then this would be the procedure doing it. I wouldn’t call it a cover, but I don’t think anyone on the committee would have been willing to vote to push interest rates as high as 20 percent. This was a way to achieve a result, a more effective way to get there.””
    • Woolley 1984 pg 104: “The 1979 reforms did not reflect the kind of intellectual conversion that the monetarists have long hoped for. It was a decision forced on the Federal Reserve by external economic forces and political constraints; among the latter, count the monetarists. In this sense, the 1979 reforms were a classic example of Federal Reserve technical-political maneuvering. The Federal Reserve needed to solve several grave problems. It had to let interest rates rise to historically high levels without having to choose to do explicitly.”
  • 75.

    Chappell et al. 2004 pg 153-154: “It was also common for FOMC members to view the committee’s money growth targets as a shield from the political attacks that often followed increases in interest rates. In August 1975, Governor Robert Holland suggested a strategy of backing off from stating interest rate targets because would soon require them to be explicit about seeking higher rates (Memorandum, August 15, 1975, 970). Sixteen months laters, Minneapolis Fed president MacLaury spoke of his desire to attach a bit more importance to the monetary aggregates:
    ‘I certainly have been among those who have viewed the greater emphaiss on the monetary aggregates as useful but perhaps in a different way than the monetarists do. Not because I think there is great stability between any particular aggregate and the economy…. Rather it has seemed to me for a rather political point of view dealing with the Congress, the public in general, that the aggregates, in an admittedly oversimplified way distracted some over-attention to interest rates and our impact upon interest rates[;] that we could explain to the public what we were doing by reference to the aggregates in a way that seemed to make at least structural sense. And that therefore, when the time came for raising interest rates we could adhere to and speak in terms of the aggregates.’ (Transcripts, December 20, 1976, tape 8, 2, emphasis added)
    This was not the first time that MacLaury had taken such a position. During an earlier meeting, he had said, ‘I think for political reasons, it’s very important that we continue to attach some significance to these aggregates and let interest rates in effect move as we try to pursue those aggregates’ (Transcripts, April 20, 1976, tape 7, 1). These examples illustrate a strategy that the committee would again find appealing in 1979, when the Fed ostensibly abandoned interest rate targets in favor of reserve aggregates: when interest rates start getting high, (pretend to) target money.”

  • 76.
    • Greider 1987 pgs 188-189: “The Fed, in less obvious ways, was also under attack. The thousands of small independent home builders across the country held Volcker and the government personally responsible for wrecking them with high interest rates. Starts of new housing construction averaged 1.7 million units for 1979, well below the industry’s potential, but 1980 was much worse. In May, housing starts fell to an annual rate of 940,000. From December to April, the monthly bankruptcies of businesses rose from 2,394 to 3,756 and many of the failed businesses were home builders.
      Hundreds of the contractors staged an informal protest—they put postage stamps on blocks of two-by-fours and bricks and mailed them to the officers of the Federal Reserve. The lumber and bricks were supposed to remind the Fed of all the new homes that would not be built because of its monetary policy. Like other public officials, the Federal Reserve governors were accustomed to nasty mail, but now the letters became more numerous and abusive, including threats of potential harm aimed at the chairman.”
    • Joseph R. Coyne, who worked at the Federal Reserve during and after the Volcker era, notes in Coyne 2005:“My next reflection is about consumer activists and, especially, Gail Cincotta. Mrs. Cincotta was from Chicago and an old-school activist for the consumer—make a lot of noise and you’ll get attention.
      Activist groups had scheduled a meeting in Baltimore and wanted Chairman Volcker to address them about high and rising interest rates. This is when I began to feel like the corporal in a John Wayne movie. You know, John Wayne is riding with his cavalry unit in the Old West when a group of hostile Indians appears on the horizon. Wayne says, “Corporal, take the point.”
      Needless to say, I wasn’t too enthralled about the Chairman addressing this meeting. I discussed the invitation letter from Mrs. Cincotta with him, and he, noting that the meeting was in Baltimore, suggested that we turn for help to then President Bob Black of the Federal Reserve Bank of Richmond.
      So, I telephoned President Black, and it turned out that he, too, had a corporal. He assigned one of his top officers to go to Baltimore and appear at the meeting. I later received a letter from that officer explaining the rough verbal treatment he got and that he was really unable to deliver any type of reasonable speech.
      That corporal later became the vice president of the new Baltimore Branch and still later was appointed president of the Federal Reserve Bank of Dallas. I like to think I was somehow instrumental in furthering Bob McTeer’s career.
      My turn as the corporal came quickly. Mrs. Cincotta, not soothed by events in Baltimore, brought her group to Washington. Three busloads of protesters wound up at the Board’s C Street entrance and began demonstrating against high interest rates. One demonstrator wore a shark’s costume—the “loan shark.” I went down to negotiate with her, not by myself, mind you, but with two very tall staff economists, Peter Keir and Bob Lawrence.
      She wanted the entire group to meet inside the building with the Chairman. He agreed to a meeting but with a much smaller group. After a long period of negotiation, she reluctantly cut the number to about 15. Tensions ran high during the meeting, which lasted about 45 minutes to an hour. Afterward, Chairman Volcker went down to the C Street entrance and made some off-the-cuff remarks to the crowd—with the “shark” standing nearby.
      Later, Mrs. Cincotta said that, since members of the various consumer groups involved lived in various parts of the country, she would like to schedule a series of meetings with us in various cities to discuss our policies. They would select the cities and arrange the meeting sites. I thought this was a great idea because it would show our willingness to at least listen to their concerns and probably discourage them from picketing our buildings.
      To make a long story short, we held the meetings and sent at least two senior officials from the Board and two from each Reserve Bank where the meetings were held. As you might expect, the meetings ranged from tense to extremely tense to sometimes threatening.
      This is where the purple hearts came in. The graphics section whipped up some purple-colored pin cushions shaped like hearts and suggested they be awarded to those who had faced the verbal darts and spears that flew at the regional meetings. The Chairman himself made the presentations at a formal Board meeting.
      After regional meetings in nine cities, including New York, Chicago, San Francisco, Richmond, and Des Moines, Mrs. Cincotta requested another meeting with the Chairman in Washington. He agreed, but the meeting broke up when a few of the visitors started shouting and walked out. A few days later, we awarded the Chairman a purple heart for his valiant efforts.
      Next came the farmers. They had planned a march on Washington to complain about economic conditions and came complete with their tractors, parking them at the foot of Capitol Hill. We thought we were safe.
      But without warning, some tractors showed up on C Street, and again the “corporal” was called. Fortunately, it was a small group of farmers, so we found a vacant conference room and invited them in. Their lawyer did most of the talking. What they wanted were low-cost loans from the Reserve Banks similar to those made by the Reserve Banks to some businesses during the Great Depression. They were turned down.
      Meanwhile, the Board received hundreds, perhaps even thousands, of small pieces of lumber, each measuring exactly 2x4x9 inches. They were sent by home builders and realtors, and each carried a message such as “Cut the deficit” or “Lower interest rates.” NBC News took a picture of a stack of them in the Chairman’s office.
      Keys also arrived, representing houses that weren’t being built and cars that weren’t being sold. One Congressman delivered a big batch of keys, which Governor Partee received on behalf of the Board. He then presented the Congressman with a cardboard sword, made by our graphics section, with the inscription “Cut the Deficit.” Governor Partee, incidentally, also attended the regional meeting in Chicago and received one of the purple hearts.
      As you can see from all this, the effects of the 1979 meeting were widespread throughout the country. The number of stories that could be told are almost endless.”
    • Washington Post 2014a: “It is unclear how much grassroots opposition may influence Fed thinking – particularly since it occurs so rarely. Meltzer said he could not recall activists ever gathering at Jackson Hole. The last public campaign mobilized against the Fed was in the 1980s, when then-Chairman Paul Volcker was hiking interest rates to stem double-digit inflation. Though he successfully brought prices under control, the economy went into recession as a result. Farmers and construction workers were particularly hard hit by the rate hikes, and they mailed blocks of wood to the Fed in protest and blocked its entrances with tractors.
      The measures did little to sway Volcker, according to Stephen Axilrod, who worked at the Fed for three decades and was among Volcker’s key aides. His course had been set.
      “None of that, in my head, had much to do with anything,” Axilrod said.”
  • 77.
    • Woolley 1984 pg 76-77: “Bankers do little direct lobbying of the Federal Reserve Board about monetary policy. This is reflected in the ABA’s decision not to allocate research staff primarily to following monetary policy. The ABA monitors monetary policy only in a general way. A primary source of information in recent years has been quarterly oversight hearings by the Banking Committees of Congress – scarcely an up-to-the-minute source. This is equally true of the Association of Reserve City Bankers, which does not monitor monetary policy at all through its Washington office. The view of some bank lobbyists is that bankers do not need to lobby the Federal Reserve in order to make their general preferences known. They argue that anyone who pays close attention to the media knows that bankers generally prefer less inflation and a lower rate of growth of the money supply. The implication of this view is that direct contract would do nothing more to influence Federal Reserve decisions.
      There is more contact on regulatory issues, although the line of separation from monetary policy is admittedly a fine one. Each year, delegations from the state banking associations come to Washington to visit their regulators and other relevant officials in the city. These meetings and the continuing involvement in questions of bank regulation reinforce an awareness of and sensitivity to the bankers’ concerns. However, bankers are not invited to lobby Federal Reserve Board members personally about specific pending regulatory decisions. Board members are proud of maintaining a formal aloofness from this sort of lobbying by bankers.
      Formal contacts. The only regular, formalized opportunity for Federal Reserve Board members to meet with bankers is in the Federal Advisory Council (FAC). Bankers in the FAC usually have their own in-house economists who are capable of briefing them adequately on current monetary policy and its implications for their institutions. Thus, there is little doubt that the FAC provides an opportunity for bankers to express their preferences to the board. The meetings are arranged so that a series of agenda items, involving both regulatory and monetary matters, is considered in the course of a lengthy session, usually attended by several board members. Bankers are asked to express their views on a number of issues identified as being of interest to the board. A reading of the minutes of FAC meetings shows that the interactions are typically dominated by the board and its questions rather than by the bankers.

      By 1970, most observers agreed that the impact of the FAC on policy was quite low, continuing a lengthy decline in influence stretching for more than 20 years. At times active and vocal in early policy debates, by the end of the 1940s the FAC was operating quietly. Recently, it has surfaced when it has been convenient to the Federal Reserve Board that it do so – as in 1974, urging caution in bank lending practices. Otherwise, the FAC has been virtually invisible and relatively unimportant.
      The FAC has also been used as an informal means of notifying the banking community of the board’s concerns about bank behavior and of potential risks involved in current banking practices. For example, in 1972 board members complained about the practice of extending loan commitments without exercising sufficient caution about problems that might be encountered in future periods of tight money. It does not appear, in retrospect, that this complaint had much impact on banking practice.”
    • CPD Memo on the Alleged Insulation of the Federal Reserve from Political Pressure
  • 78.
    • Woolley 1984 pg 78: “Informal contacts. On many occasions, Federal Reserve Board members are thrust into social interactions with bankers. On frequent trips for speaking to bankers and other financial groups, board members inevitably fraternize with bankers over dinner, at cocktail parties, and at receptions. It is not uncommon to find reference in the Federal Open Market Committee Minutes to recent meetings with groups of bankers and business, or both.
      Given the varied kinds of contacts between Federal Reserve officials and bankers, and given the relative absence of contacts between Federal Reserve officials and representatives of other major organized interests, it is accurate to speak of the System as being a banker’s milieu. By contrast, as AFL-CIO economist Markley Roberts observes with only slight hyperbole, ‘Fed officials don’t lunch – or even consult – with consumer or worker representatives.’ At a more general level, a former governor [note: Maisel] agrees: ‘the Fed interacts far less frequently with debtor groups or the less wealthy than with the Establishment, which prefers a more restrictive monetary policy.’ This does not exclude the possibility of indirect influences through Congress or the president. But any advantages of this sort favoring bankers must be taken seriously.”
    • Greider 1987 pg 461-462: “Among themselves, the policy makers talked like financial engineers, working out the abstract problems of money demand and velocity and reserve control. The narrow focus allowed them to distance themselves from the messy reality outside the boardroom. It was considered bad taste to dwell on stories of personal tragedy. Anthony Solomon of the New York Fed said matter-of-factly:
      “Once in a while you get a rational letter. The guy’s in trouble, it evokes sympathies. Sometimes, the letters are stupid or obscene. But we are sheltered. We are meeting mostly with business people, financial people, government officials, foreign leaders and little bit with labor leaders. It isn’t as though we run into a large number of people who lost their jobs or their car dealerships.””
  • 79.

    Hilsenrath 2014: “A Wall Street Journal analysis of her calendar shows that in her first six months as Fed boss she spent more than 55 hours on phone calls and private meetings with Fed governors and the 12 regional-bank presidents. That contrasts with eight hours spent with private-sector bankers.”

  • 80.

    See above for a discussion of the campaign activities to date around the retirement of the Dallas and Philadelphia Fed presidents. The president of the Minneapolis Fed, Narayana Kocherlakota, currently the most dovish voting member of the FOMC, has also since announced plans to step down in February 2016. New York Times 2014b: “Wednesday was Mr. Kocherlakota’s last vote on monetary policy — the presidents of most reserve banks vote every third year, and Mr. Kocherlakota said this month that he would step down in February 2016.”

  • 81.

    GiveWell’s non-verbatim summary of a conversation with Brian Kettering on October 16, 2014: “CPD’s budget includes roughly $2 million dollars in unrestricted funds. The rest of its funding is limited to specific issues. CPD would prefer to have more unrestricted funds, so it could undertake more experimentation without having to solicit specific funding. Its general-use funding currently supports core operations.”

  • 82.

    CPD has already raised $100,000 from another foundation, and anticipates raising another ~$150,000 from other funders. Fed Up 2015 Budget

  • 83.

    Notes from a conversation with Josh Bivens on February 6, 2014: “Dr. Bivens believes that many Fed policymakers worry that additional political engagement in monetary policy would be a mistake. Although policymakers might welcome support for their current policies, they seem to worry that more vocal engagement by political agents might be harmful in the future when the Fed needs to raise interest rates to prevent inflation.
    Dr. Bivens believes that fears about popular control of macroeconomic policy are overblown because:

    • The economy is still far from achieving full employment today. More pressure from liberals would likely lead to better policies in the short term, and long-term consequences could be dealt with in the future if they become a problem.
    • The Fed is usually too conservative in its projections of the non-accelerating inflation rate of unemployment (NAIRU). When the unemployment rate nears 5.5%, experts will debate whether the economy is approaching the NAIRU. Dr. Bivens does not want the Fed to be overly cautious in this situation; he would like to see evidence of accelerating inflation before the Fed slows the growth of the economy. People have generally been confident that the NAIRU is near 5.5%, but in the late 90s, the unemployment rate fell below 4% for a couple of months without accelerating inflation.
    • As Lawrence Summers argues, it might be the case that the economy will consistently struggle to generate sufficient demand for the next couple of decades. In such a situation, pressure from liberals for more aggressive macroeconomic policy would be very useful and would be unlikely to lead to problems.”
  • 84.

    WSJ 2014b, New York Times 2014g

  • 85.

    WSJ 2014d

  • 86.

    WSJ 2014e

  • 87.

    IGM Survey on Congress and Monetary Policy

  • 88.

    See WSJ 2014b and Bloomberg News 2014b.

  • 89.

    See, e.g., Stein 2014.

  • 90.

    See, e.g., Chodorow-Reich 2014 and Yellen 2014.

  • 91.

    Fisher 2014: “The notion that “we can always tighten” if it turns out that the economy is stronger than we thought it would be or that we’ve overshot full employment is dangerous. Tightening monetary policy once we have pushed past sustainable capacity limits has almost always resulted in recession, the last thing we need in the aftermath of the crisis we have just suffered.”

  • 92.
    • “The Federal Reserve System (“the Fed”) received a significant amount of pressure from conservatives to reduce its intervention in the economy following its response to the Great Recession, but it received little pressure to increase its efforts to reduce unemployment. The lack of pressure from the organized left was especially notable. There may have been less liberal pressure on the Fed because many liberals believe that fiscal policy is a more effective means of reducing unemployment at the zero lower bound than monetary policy.” Notes from a conversation with Josh Bivens on February 6, 2014
    • “It would be good for unions and advocates for low-income people to be more vocal in calling for the Federal Reserve to aggressively address unemployment. In the past, liberal populists criticized the Federal Reserve for raising interest rates too much during economic prosperity, but today the main critics are on the political right.”Notes from a conversation with Laurence Ball on April 17, 2014
    • “Traditionally, many right-wing think tanks have had monetary policy researchers, but these researchers have generally been driven by ideology, have not produced rigorous research, and have focused on fringe topics, such as the benefits of a gold standard.” Notes from a conversation with Mike Konczal on January 23, 2014
    • Wall Street Journal reporter Josh Zumbrun also noted this possibility in a series of tweets responding to New York Times 2014d.
  • 93.

    In particular, we read: