Economics and Politics

I repeatedly hear claims that solving the current global economic problems merely requires political will. If it wasn’t for the Republican obstructionists or the pigheaded Germans, the problems could (would?) be solved. What I find frustrating about this narrative is its simultaneous simplicity and certainty about the necessary policy prescriptions. Isn’t it possible that so-called Republican obstructionism is the result of a belief on the part of Republicans that the policies they are supposedly obstructing would be ineffective or deleterious? Isn’t it possible that the German leadership is opposed to many suggested policy prescriptions because they believe that many of these proposals simply kick the can down the road and leave them holding the bag? (Isn’t it possible to squeeze countless metaphors into one sentence?!)

The point that I am making is not that the Republicans or the Germans are correct, but rather that it is not certain that they are incorrect. And in the case of Germany, it would seem that they have little to gain and much to lose by helping troubled Eurozone members. Many forget that from the German perspective the ECB’s monetary policy is close to optimal. As such, Germany is likely to be the most insulated from a European economic slowdown — at least according to New Keynesian-style logic. If it makes economic sense for the German leadership to take the position that it does, how can we fault them? Perhaps one could argue that they should care about their fellow Europeans, but that is philosophical and something that is beyond the scope of economics.

In the U.S., what types of policies have been prevented by political obstructionism that would have helped? What evidence is there that these policies would have helped? Is there a competing narrative that can explain the same outcome?

Frequent readers know that I think that monetary policy in the U.S. has been suboptimal. There are “political will” narratives here as well. Those who think that monetary policy has been tight think that the Fed lacks the political will to do what is correct right now. Many of those who think that monetary policy is going to create higher rates of inflation in the near future think that the Fed will lack the political will to bring down inflation when it starts to rise.

A much simpler story is that the Fed is an inflation targeter, with a not-so-implicit-anymore target of 2%. Under this narrative, the past rate of inflation is irrelevant. What matters is preventing the inflation rate from being consistently below target. When I look at the data and when I read speeches by folks like Jim Bullard, this seems entirely more plausible than the political will narrative.

In addition, if the political will narrative is correct, then aren’t these arguments really arguments against the Federal Reserve itself rather than merely policy? In other words, if there is an optimal policy that the Federal Reserve refuses to pursue because of political risks such as diminished credibility, then why have a monetary authority in the first place?

The political will narrative is easy to adopt and probably has some psychological appeal as well. If the POTUS isn’t signing into law policies that you believe would help or if the central bank isn’t following the policy that you believe would be optimal, it is perhaps easiest to think that they simply lack the political will to get things done. Whether policy has been optimal also depends on the objective. If the Fed’s objective is 2% inflation, then they have done a remarkable job. If the Fed’s objective is a trend path for the price level or nominal GDP, then they have done a substantially less than remarkable job. Perhaps it is political will that explains the policy path that has been chosen, but it is possible that there are alternative and entirely valid explanations of such a path.

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