We need to ‘get over yourself’ once again

A little historical background on economic policy helps us obtain a useful perspective.

“Get over yourself” is an expression that could mean two related, but very different things. In the first type it means that the recipient is inflating his or her importance. In the second type the meaning is that the recipient is carrying too much guilt and responsibility for a failure that was really a team screw up.

The second type of message is common in sports. In locker rooms from high school level to the professional, coaches will remind players on a team that missed a chance to win because of a fumble, a strikeout, or a missed foul shot they wouldn’t have been in that one-last-chance situation if many mistakes hadn’t been made throughout the game. The message then zeroes in on the player that made the heartbreaking error: Pick yourself up; we win or lose as a team, and we need you at you best, not moping around with guilt.

A new economic research report, though, clearly reveals a need for a third type of “get over yourself” message. The report is by two economists at the San Francisco Federal Reserve and takes a different approach to examining monetary policy. Their conclusions send a message that could touch off an entirely new perspective on monetary policy decisions. Especially interesting is that the conclusions also raise the possibility that in their disagreement over interest rates, both President Trump and Federal Reserve Chairman Powell could be right.

The economists, Oscar Jorda and Alan M, Taylor were interested in how much a central bank’s policy really affected interest rates. Is our Federal Reserve, for example, or any central bank, responsible for interest rate levels 100 percent or some smaller portion?

Their report, titled, “Riders on the Storm,” provides their answer in its very first sentence: “A country’s interest rate often reflects more than just the policy stance of its central bank.” Far from total responsibility, the report goes on to say, “…central bank policy explains less than half of the variation in interest rates. The rest of the time the central bank is catching up to trends dictated by productivity growth, demographics, and other factors outside of its control.”

This could easily be mistaken for a first type of “Get over yourself” message but when placed in perspective, the report is not meant as a criticism of the Fed but rather a recognition of its limitations. It is also a recognition that the global economy is a factor that must be considered when setting economic policies. We are not alone.

A little historical background on economic policy helps us obtain a useful perspective. The heady days of the 1960s were a time when economists became visible in both government and the general population. The chief government economist could claim that the formula for economic stability and growth had been found. All that was necessary in the future was some “fine tuning.”

That kind of overconfidence wasn’t limited to the United States. In the Soviet Union, our principal competition at that time, economists claimed that through the matrix model developed by economist Wassily Leontief they could exert perfect control over their economy just as soon as they built computers big enough to handle the math.

Both countries were soon disabused of their illusions. The Soviet Union was consumed with economic and political failures and eventually decided to let markets make some of the decisions.

In our country, shifts in our economy forced economists to focus more on monetary policy. As federal deficits became a permanent fixture of government finance, fiscal policy – adjusting the economy by regulating government spending – effectively disappeared. “Fine tuning” was eventually replaced with “tweaking” and as Wall Street began to play a more and more important role in people’s lives and public sentiment, “tweaking” – regulating the economy by adjustments in the interest rate and money supply — became the dominant element in the nation’s economic policy, along with occasionally providing liquidity to faltering financial markets.

The authors of the research report have used a statistical model to examine the economies and financial policies of Japan, Germany, the U.K., and the United States. It succeeded in producing an eye-opening perspective on monetary policy’s ability to control our economy. The report also raises the possibility that President Trump and Fed Chairman Powell are looking at the economy from different perspectives – both correct. To return to a sports analogy, their disagreement resembles the perennial argument of how games are won, on offense or defense. The president is looking at the non-monetary elements of consumer and business attitudes while the chairman is seeing our own financial markets, money supply, and the other central bank policies. Neither is wrong to do so, and the truth is that we need both. JAMES MCCUSKER -30-

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