Yesterday, Paul Krugman wrote about the Federal Reserve’s almost certain coming interest rate hike. I’ve been very gloomy about this and you all may be very bored with my obsession. But it is really important. And Krugman added an extra bit of gloom. He said that the Fed could very well be wrong about the economy — causing it to stagnate. “And this would be much more serious than a modest uptick in inflation, because it’s not at all clear what the Fed could do to fix its mistake.” That sentence sent a chill down my spine.
The issue isn’t really interest rates; it is rather the expectations of the business community. It doesn’t take much for the economy to go on tilt. A few businesses start laying off workers and it starts a cascade. And the Fed does what? Lower interest rates?! The interest rates wouldn’t be high enough for that to have much effect. The vast majority of businesses are just reacting to the businesses that reacted badly to the first Fed rise. Sure: it will all sort itself out. Eventually. But I’m old enough to take Keynes’ maxim very seriously, “In the long run we are all dead.”
Krugman has written a lot over the last several years about how inexplicable it is that policymakers continue to listen the advice of people who have been “wrong every step of the way.” But I don’t really understand his confusion. Isn’t it clear enough that it is the policymakers themselves who want to do what has been shown to be “wrong every step of the way”? I am not inclined to give the Fed much credit here. It is an institution of, by, and for the bankers. It isn’t raising interest rates because it thinks this is what the economy needs right now; it is raising them because it wants to and now it can get away with it.
But let’s suppose that Janet Yellen and Partners, LLC does get it wrong. Let’s suppose they raise interest rates and the economy stagnates or goes into recession. That will mean millions of people who should have had jobs won’t. But I can tell you some people who won’t be out of a job: Fed Chair Janet Yellen; Fed Vice-Chair Stanley Fischer; Fed Governor Daniel Tarullo; and so on. None of them will be held to account. People like that are never held to account.
Krugman wrote, “But those critics have been wrong every step of the way. Why start taking them seriously now?” A better question might be, “Why do they even have jobs?” The truth is a professional fire fighter who was terrible at his job would not be a professional fire fighter. That goes for pretty much every job that regular people have.
I was recently on the periphery of the firing of a writer at my day job. I feel bad about it because I was at least party to blame: I complained about him a lot. The truth is that he was turning in crap work. Yet the work was passable. He never did anything that seriously damaged the company. But if the Fed seriously damages our economy, no one will be fired.