Gongol.com Archives: November 2021
It seems never to fail that whenever the word "inflation" enters the contemporary conversation, the challenge of the Federal Reserve's "dual mandate" comes to the forefront. This dual mandate is an assignment from Congress to simultaneously seek maximum employment and price stability. ■ Critics find some easy historical references to support them, like Matthew 6:24 ("No one can serve two masters") and the laundry list of two-front wars that exhausted the states fighting them. ■ Yet the world is full of dual mandates (and even multifactor mandates), and nothing about them is necessarily impossible to execute. They do, however, demand some modesty about how we approach them and how much we can expect of the outcomes. ■ Purchasing a vehicle, for instance, isn't something that comes down to just one dimension: The choice is usually a balance of capability (carrying the right number of passengers and the right type of cargo), fuel efficiency, resale value, and comfort, among other values individuals are free to weigh. If a single purchasing decision requires such a dynamic evaluation, surely so does the economy -- the aggregate of all discrete purchasing decisions. ■ Milton Friedman famously hypothesized that the money supply would ideally be set impartially and dispassionately by a computer to respond to obtainable economic data. A stable, predictable rate of increase in the money supply (as envisioned by Friedman) would be ideal. Yet, even a perfectly divined program for calculating the size of that money supply would require constant human intervention: Someone would have had to program it to analyze inputs and outputs in the first place, and then recurring interventions would be necessary to update it to reflect new judgments about how to value those inputs and outputs. The price of leaded gas no longer matters, but the price of a smartphone does. ■ In other words, a dispassionate computer may seem ideal, but it is impossible to remove the humans from the system. We create the data, measure it, and decide how important it is -- even artificial intelligence can't be trusted to do that for us. And what the Federal Reserve is being asked to do right now is a gargantuan task. The money supply grew in extraordinary ways to get past the pandemic shock of 2020, and Americans have been behaving strangely with our money ever since 2008, moving our dollars slower than at any time in modern history. ■ Any change to that velocity of money is going to have a hugely magnified impact. As with most money matters, leverage counts. And in this case, the leverage of a big supply of money moving anywhere close to historical rates (rather than at the extremely abnormal snail's pace of the last 13 years) could make it hard even for a highly-skilled Federal Reserve to pull away the punch bowl just as the party gets warmed up. ■ That's neither an enviable position to be in, nor a condition anyone can be expected to navigate deftly. And it all takes place against that second part of the dual mandate -- maximum employment -- which is tough to measure against a long-term decline in the labor force participation rate (in no small part due to generational turnover) overlapping with a one-time shock adjustment downward, from which it does not appear that a full recovery is going to take place. Some people left the workforce in 2020 and just may not ever come back. ■ Someone will soon be nominated to chair the Federal Reserve for the next term, and it could be the incumbent, Jerome Powell. Whoever it is will likely have to navigate one of the most complex (and highest-stakes) economic experiments of all time, balancing the interests of a big population living on investments and fixed incomes (and thus historically hypersensitive to inflation) with a large wave of early-career workers with high expectations for career opportunities and economic expansion. ■ If the Federal Reserve had only a dual mandate to navigate, it would be a challenge -- but to respond to both in the midst of competing intergenerational interests and unprecedented changes in fundamental data will take a great deal of wisdom and more than a little bit of luck. The closer they can emulate the steadiness of Friedman's computer while making necessary adjustments to the programming along the way, the better for all of us.