This is In Real Terms, a column analyzing the week in economic news. We’re still experimenting with the format, so tell us what you think. Email me or drop a note in the comments. And thank you for all the great feedback so far!
After the financial world exploded in 2008, the Federal Reserve took all sorts of unprecedented steps to save, and later jump-start, the U.S. economy. It bailed out banks. It bailed out foreign banks. It bailed out non-banks. It cut interest rates to (pretty much) zero. It bought government bonds. It bought mortgage bonds. It started — and this one was truly radical — holding press conferences.
But lots of people thought the Fed needed to go further and rethink its approach to monetary policy. In newspaper op-eds, CNBC interviews and, most of all, the blogosphere, economists and wannabe-economists (that’s me) argued over a smorgasbord of jargon-filled proposals: nominal GDP targeting,price-level targeting, negative interest rates.
A handful of central banks have experimented with some of these approaches in recent years, but the Fed itself has never come close to adopting any of them. The U.S. was, after all, in the middle of the worst recession since the Great Depression. From the perspective of the people making policy decisions, the whole debate seemed a bit like arguing about firefighting strategies from inside a burning building.
Now that the fire is out, though, the Fed is returning to the debate. Last week, I sat down with John Williams, president of the Federal Reserve Bank of San Francisco, who was in New York for a conference on monetary policy. Williams said changing policies during or immediately after the crisis would have been a mistake. That “would have just been confusing and kind of undermined the [Fed’s] credibility,” he said. But it would also be a mistake, he said, to put those discussions off for too long.
“Now that we’re more or less at full strength, I do think it’s time now to think about what the right strategy is,” Williams said.
The strategy in question is how the Fed should manage the economy when interest rates are low. Ordinarily, when the Fed wants to stimulate the economy, it cuts interest rates to encourage borrowing. But during the recession, the Fed cut rates all the way to zero, rendering its traditional tool ineffective. That isn’t a problem right now — the Fed is in the process of raising rates, after all — but it could become one again before long. For various (and not very well-understood) reasons — an aging population, slowing productivity growth — the economy’s underlying rate of growth seems to have fallen in recent years. That means interest rates are likely to stay low as well, which means that even a comparatively mild recession could force the Fed to cut rates back to zero.
The various jargon-filled proposals all aim to help the Fed stimulate the economy when rates are at zero, or to help prevent them from getting there in the first place. Williams made clear that he was advocating for a debate, not for any particular policy. But some of his colleagues are less circumspect. Last year, St. Louis Fed President James Bullard effectively endorsed one approach; Narayana Kocherlakota, the recently retired president of the Minneapolis Fed, was an advocate for another. (The details of these programs, and their potential advantages anddisadvantages, have been well-explored elsewhere.)
The person whose opinion matters most, of course, is Fed Chair Janet Yellen, and so far she’s kept her cards close to her vest. But she has made it clear that the Fed is studying its options and closely following the policy experiments underway in other countries.
The bigger picture here is that the economy is pretty good right now, but it won’t be forever. That means now is the time to address the longer-run policy questions — and not just for the Fed. The unemployment insurance system, as I wrote a few weeks back, is long overdue for an overhaul. Wall Street banks are still “too big to fail.” Rising Social Security and Medicare expenses threaten to drive the federal debt to unsustainable levels (though the immediacy of that threat is often exaggerated).
Of course, it’s an election year, which means that even less is getting done in Congress than usual. But when a new president is sworn in next year, he or she would be wise to follow the Fed’s lead and think hard about the lessons from the last crisis — before the next one hits.
Recession watch
“The next one,” by the way, is probably still a ways off, according to Williams, the San Francisco Fed president. Williams has become known as a bit of an economic optimist, but he said that reputation isn’t quite fair. His forecast doesn’t differ much from those of other mainstream economists: He expects another year of slow economic growth, continued improvement in the job market and a gradual rise in inflation.
Where Williams does differ from many experts is in his assessment of the risks facing the U.S. economy. Economists — and, to an even greater degree,financial markets — have become increasingly nervous about global troubles spreading to the U.S. Williams is less concerned. None of those problems — China’s slowdown, Europe’s decade-long slump, falling oil prices, a strengthening dollar — are new, and yet the U.S. recovery has remained on track. That suggests it will take a stronger shock to knock the U.S. economy off course.
“It’s not that I’m Pollyannaish or in any way unaware of the risks of the global economy,” Williams said. “It’s just it seems to me that we’ve been living through a lot of these downside risks already for several years … but the strength of domestic demand in the U.S. economy has been sufficient to overcome that.”
Buoyant billionaire
One person whose reputation for optimism is well-deserved: Warren Buffett. In his annual letter to shareholders, released over the weekend, the Omaha billionaire pooh-poohed politicians who talk as though America’s best days are in the past. He even has some back-of-the-envelope math to prove his point: Right now, per capita GDP is about $56,000, which (not entirely coincidentally) is roughly the same as the U.S. median household income. If the economy keeps rising at its current rate of 2 percent per year, per capita GDP will rise by $19,000 over the next 25 years (adjusted for inflation); that’s $76,000 for a family of four.
Of course, economic gains haven’t been evenly distributed in recent years. But Buffett argues that pretty much everyone will see their lives improve at least somewhat. “For 240 years it’s been a terrible mistake to bet against America, and now is no time to start,” Buffett wrote. “Yes, America’s kids will live far better than their parents did.”
Number of the week
In 2005, coal power accounted for half of all the electricity generated in the U.S. — the same share, more or less, it had for more than 50 years. And then suddenly, something shifted: Natural gas began displacing coal at an unprecedented rate. By 2015, coal was down to about a third of the power market, and there’s no sign that its decline is slowing.
It would perhaps be an exaggeration to say that Aubrey McClendon was solely responsible for that dramatic shift. But it is safe to say that it would not have occurred without him. McClendon, who died in a car crash Wednesday, was the swashbuckling founder and former CEO of Chesapeake Energy Corp., the company that, more than any other, defined the shale energy boom of the past decade.
McClendon wasn’t the one who figured out how to extract natural gas from shale rock, but he was the first to see shale’s potential to reshape the industry. It was Chesapeake that dared to drill wells in downtown Fort Worth, Texas; Chesapeake that pushed the boom into Pennsylvania and Louisiana; Chesapeake that invented new ways to fund its voracious expansion; and Chesapeake that, when all that new supply glutted the market, founded a lobbying group to try to drive up demand. At times, it seemed as though the rest of the industry was just trying to keep up.
McClendon was a complicated, controversial and flawed man. He nearly bankrupted Chesapeake more than once, and he left the company in 2013 under the cloud of financial scandal. His death came the day after he was indicted on federal antitrust charges. But McClendon’s life serves as a reminder that though we measure the economy in numbers — millions of jobs, billions in earnings, trillions in debt — one man can still change the world
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