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Research

Making Central Banks More Resistant to Political Pressures and Fads

Charles W. Calomiris | April 14, 2014

This paper was presented April 13, 2014 at the International Monetary Fund’s Spring 2014 Meetings, in the session entitled “Can or Should Central Banks Remain Fully Independent Despite a Wider Mandate and Considerable Fiscal Pressure?”

Over the first 100 years of Federal Reserve System history, the United States enjoyed both price stability and the absence of banking crises in only about a quarter of those years. Allan Meltzer’s (2003, 2009, 2010) three volume history of the Fed (and the voluminous literature on Fed history published before and since)[1] document that two main influences explain persistent Fed failure: politicization of Fed decisions (especially to elicit Fed assistance in accomplishing short-term fiscal or electoral objectives of the Administration), and model misspecification (reflecting the limits of Fed knowledge about the economy).

The Relevance of Federal Reserve Surplus Capital for Current Policy

Marvin Goodfriend | March 17, 2014

INTRODUCTION

Surplus capital is employed in commercial enterprises as a reserve for contingencies such as absorbing losses or meeting expenses and dividends when earnings are low. The Fed has employed its surplus capital in a similar manner. Prior to the 2007-09 credit turmoil, the most important contingencies were exchange rate revaluations of foreign-currency-denominated securities that the Fed held for its own account. Since these have been marked to market on a regular basis, an appreciation of the foreign exchange value of the dollar would reduce the dollar value of the Fed’s foreign-security holdings

Achieving Normalcy in Monetary Policy

Mickey D. Levy | March 17, 2014

Economic performance continues to improve and in most regards has moved close to normal, but the Federal Reserve’s monetary policy remains far from normal. As the Fed tapers its asset purchases, it relies on forward guidance as a vehicle for artificially suppressing real interest rates even though the economy is in its fifth consecutive year of expansion and unemployment is declining. 

Shifting Perspectives on the Dual Mandate

Peter Ireland | March 17, 2014

Historical Evolution

Via its 1977 Amendment to the Federal Reserve Act, the United States Congress instructs our nation’s central bank to conduct monetary policy “so as to promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates.” Although these are the words most often cited as the source of the “dual mandate” requiring Federal Reserve officials to focus on both unemployment and inflation when setting interest rates and regulating the money supply, Steelman (2011) traces all the way back to the Employment Act of 1946 the more general idea that US economic policies, including those of the Fed, ought to be directed towards achieving objectives for those two variables jointly.

Recent Monetary Policy and the Fiscal Theory of the Price Level

Bennett T. McCallum | March 17, 2014

The policy actions taken by the Federal Reserve over the past six years have left the United States in an unusual condition that has led some prominent economists to suggest that the messages provided by the “Fiscal Theory of the Price Level” (henceforth, FTPL) will be of crucial importance in the near future.  The most prominent of these writings, arguably, has been a major piece by Christopher Sims in the April 2013 issue of the American Economic Review.

Has the Federal Reserve Learned to be an Effective Lender of Last Resort in its First One Hundred Years?

Michael D. Bordo | March 17, 2014

Origins

The Federal Reserve was established a century ago in large part to serve as a lender of last resort to allay the financial instability of the National banking era and especially to avoid panics like that of 1907. Other advanced countries had long established central banks and they, especially the Bank of England had learned to act as LLR by adopting Walter Bagehot’s rules. In simplest terms what is commonly known today as Bagehot’s Rule is to “Lend freely at a penalty rate”. To be more exact Bagehot had a number of strictures (Humphrey 1975, Bordo 1990);

Reforming the Rules That Govern the Fed

Charles W. Calomiris | March 17, 2014

Abstract

The Fed has achieved both of its central objectives – price stability and financial stability – in only about a quarter of its years of operation. What reforms would be likely to improve that performance? This article focuses on two problems that have plagued the Fed throughout its history: adherence to bad ideas, especially to influence from intellectual fads in macroeconomics, which have produced major policy errors; and politicization of the Fed, which leads it to pursue objectives other than price stability and financial stability. Several reforms are proposed to the structure and governance of the Fed, and its policy mandates, which would promote greater diversity of thought and independence from political pressures, which in turn would insulate the Fed from political pressures and make its thinking less susceptible to intellectual fads.

Beyond the Spin: Why it’s Terrible News that the ACA Lowers Employment

Charles Blahous | March 3, 2014

On February 4, 2014, the Congressional Budget Office (CBO) released a report that instantly became a focus of intense controversy and competing political spin. The report found that the Affordable Care Act (ACA or “Obamacare”) would reduce US employment by the equivalent of 2 million full-time workers by 2017, 2.5 million by 2024.

CBO: The ACA is Driving Workers Out of the Workforce

Charles Blahous | February 5, 2014

For the past few years, a problematic phenomenon has troubled economists: US job growth has been anemic even as the unemployment rate has steadily dropped, mainly because large numbers of workers are dropping out of the workforce altogether.

The Collapse of the Great Gatsby Curve

Scott Winship, Donald Schneider | February 3, 2014

 

As expected, President Obama’s State of the Union address to the nation last week was suffused with the theme of opportunity. Over the past two years, the president has consistently tied the opportunities of poor and middle class Americans to rising income inequality, and Tuesday he stayed true to this narrative:

Testimony before the Committee on the Budget, U.S. House of Representatives, Washington, D.C. January 28, 2014

Scott Winship | January 28, 2014

Chairman Ryan, Ranking Member Van Hollen, and Members of the Committee, thank you for inviting me to appear today to discuss the central issues of poverty and opportunity in America. The fiftieth anniversary of Lyndon Johnson’s declaration of war on poverty provides an occasion to reflect on federal anti-poverty policy to date and policies to promote opportunity and to consider how to build on the progress we have made while improving on those features of policy that have not served us well.

Inequality Testimony before the Joint Economic Committee

Scott Winship | January 15, 2014

 

Chairman Brady, Vice Chair Klobuchar, and Members of the Committee, thank you for inviting me to appear today to discuss the topic of income inequality in America. With long-term unemployment historically high and still-pervasive economic insecurity in the wake of the Great Recession, it is understandable that many Americans have grown more concerned about the nation’s levels of inequality. Too many families struggle in poverty, too many workers have given up on finding fulltime work, and too many young adults have graduated into a weak economy that will lower their lifetime earnings.

At the same time, it is important to note that it is the fragility of the economy that lies behind concerns over inequality. Inequality was high and rising during the late 1990s, but because the growing economy was largely benefitting everyone, few people were worried about income concentration at the top. As the economy continues to recover and unemployment continues to fall, concern about inequality will recede.

As I will show, in long-run perspective, living standards have improved for the poor and middle class even as income inequality has grown. In part, that is because inequality has increased less than most analysts suggest. Furthermore, there is little compelling evidence that the gains at the top have reduced income growth lower down. And contrary to claims that rising income inequality has hurt inequality of opportunity, the evidence of a link between the two is weak. In part, that is because intergenerational mobility has not declined much—if at all—as income inequality has grown.

However, if intergenerational mobility is no worse today than it was decades ago, nor is it any better. We should not be satisfied as a nation with the limited upward mobility facing poor children today, and fifty years after Lyndon Johnson’s declaration of war on poverty, we should establish a second front against immobility. Attacking income inequality, however, is unlikely to reduce poverty or to promote equal opportunity; emphasizing it is, in fact, a distraction from the task at hand.

A Decade of Success: How Competition Drives Savings in Medicare Part D

Yevgeniy Feyman, Paul Howard | Center for Medical Progress | December 19, 2013

On December 8, 2003, then-president George W. Bush signed into law the Medicare Modernization Act (MMA). As part of the MMA, a new, voluntary prescription drug program called “Medicare Part D” was enacted. Beginning in 2006, Medicare enrollees would also be able to sign up for outpatient prescription drug coverage through private insurance companies, with premiums subsidized by Medicare. To date, seniors have expressed high levels of satisfaction with the program, and Part D expenditures have been more than 40 percent lower than initial government estimates—a rarity for a government health-care program.

Even though the program was controversial at the time of its launch in 2006, Part D is now often touted as a rare entitlement success story, with praise from both sides of the political aisle. 

In this report, we review data from the Centers for Medicare and Medicaid Services, the Congressional Budget Office, and other sources, to examine which factors—market competition, patent expirations, or other national trends (including private-sector innovations such as tiered formularies and preferred networks)—explain overestimates for Part D costs.

In our analysis, we find strong evidence that:

National trends are not a sufficient explanation for Part D’s success. 

Consumer-driven competition is a relatively new tool in the government’s effort to control health-care costs. 

Part D is an excellent model for future health-care and entitlement reforms. 

We also suggest additional reforms for Part D, including a “shared savings” program for participating plans that would encourage them to focus on chronic disease management and prevention, reducing Medicare spending in other parts of the program.

The Myth of Increasing Income Inequality

Diana Furchtgott-Roth | December 16, 2013

INTRODUCTION AND SUMMARY

President Obama has called income inequality the “defining challenge of our time,” reflecting the misguided assumption that income inequality in the U.S. has increased in recent years. Populist cries for redistribution as a means to remedy this purported inequality have gained currency in both the press and in the public imagination. This paper, based on an updated original analysis of U.S. Labor Department data, concludes that inequality as measured by per capita spending is no greater today than in it was in the 1980s.

Why We Have Federal Deficits

Charles Blahous | November 14, 2013

The federal deficit is a huge public policy problem that must be understood, confronted, and solved. Federal deficits run in these last five years dwarf any precedent in U.S. post-world-war history. The Congressional Budget Office (CBO)’s latest projections warn that without legislative corrections, deficits will rise to untenable levels with severe consequences for our economic well-being.


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