The op-ed that got Stephen Moore his Fed nomination is based on two major falsehoods

President Trump reportedly chose Stephen Moore for one of the vacancies at the Federal Reserve Board after reading a Wall Street Journal op-ed Moore wrote attacking the Fed. The piece, co-authored with Louis Woodhill, made two central claims: (1) we’re experiencing deflation, and (2) the way to address it is to follow a rule adopted by Paul Volcker in the 1980s.

Slight problem though: Both of those claims are flat-out false. There is no deflation, and Volcker never created the imaginary “rule” Moore is now attributing to him. I know, because I asked Volcker — as Moore once suggested I do.

Deflation, for those unfamiliar, means prices are falling. There are three major measures of price changes: the consumer price index, the personal consumption expenditures (PCE) price index, and the “core” PCE price index (which excludes energy and food, which can be volatile). All three show modest but positive year-over-year price increases.

.. Moore and Woodhill explain this away by saying that in fact we shouldn’t be looking at overall price changes — instead we should be looking at just a small subset of prices, specifically commodities. Commodities refer to goods that are interchangeable with one another, such as metals, oil, soybeans, wheat, etc.

Now, there’s a reason why when people talk about inflation or deflation they usually focus on the overall index rather than some cherry-picked subset of products. Some products see prices go up (doctor visits); others see them go down (TVs); what we want to know is the big-picture trend. Sure, it’s possible that changes in commodity prices might eventually flow through to elsewhere in the economy. It’s also possible that commodities have weird, anomalous price changes driven by sudden shocks — a crop failure, say, or discovery of gold, or an oil embargo. These supply or demand shocks tell us little about whether there is too much money chasing too few goods, which is really what the Fed is trying to track.

Moore historically has had trouble distinguishing whether price changes in commodities are driven by monetary policy (that is, the Fed allowing too much or too little money to slosh around) or market-specific shocks. For instance, when I’ve appeared with him on CNN before, he has cited as evidence of “deflation” the fact that U.S. soybean prices have fallen. And hey, soybean prices are down! But as everyone in America except apparently Moore is aware, soybean prices have fallen primarily because China stopped buying U.S. soybeans in retaliation for Trump’s trade war, not because of changes in the money supply.

Nonetheless, Moore claimed in this op-ed, as well as in that CNN appearance, that his confused understanding of inflation and Fed policy was endorsed by none other than the godfather of sound Fed policy: former Fed chairman Paul Volcker.

.. On CNN, Moore said that we should follow the “Volcker Rule,” which he claimed was a rule Volcker set when he was chair in the 1980s that required linking interest rates according to movements in commodity prices. That is not actually anything close to what the Volcker Rule is about. It’s actually a regulation that prohibits banks from conducting certain investment activities with their own accounts, and has nothing to do with commodity prices or interest rates. I figured he’d misspoken, or gotten confused (this was around 7 a.m., after all), and moved on.

I was then surprised to see that Moore resuscitated this claim again in his recent Journal op-ed — you know, the one that earned him his Fed nomination. This time he didn’t foolishly refer to it the “Volcker Rule”; he said it was Volcker’s “commodity-price rule”:

The solution is obvious. The Fed should stabilize the value of the dollar by adopting the commodity-price rule used successfully by former Fed chief Paul Volcker. To break the crippling inflation of the 1970s, Mr. Volcker linked Fed monetary policy to real-time changes in commodity prices. When commodity prices rose, Mr. Volcker saw inflation coming and increased interest rates. When commodities fell in price, he lowered rates.

.. On Monday, I wrote to Moore to ask him where I could find more information about this rule, explaining that I had consulted Fed transcripts and other documents to no avail. He replied to say that Arthur Laffer, his longtime business partner and frequent co-author, had written “two very famous pieces” for the Wall Street Journal about the subject in the 1980s.

He eventually sent me one Journal op-ed from 1982, by Laffer and Charles Kadlec. It does not in fact say that Volcker adopted a price rule; rather, it says that Laffer and Kadlec speculated that such a relationship might be able to explain interest rate movements over the previous four months, and proposed how to test their theory. The headline, ending in a telltale question mark: “Has the Fed Already Put Itself on a Price Rule?”

Turns out Cato Institute senior fellow and economic historian George Selgin was also looking into Moore’s claim, and dug up another Laffer essay from this era. In this one (in Reason), Laffer explicitly says Volcker replied to that 1982 Journal op-ed to explain to Laffer why the Fed was not targeting commodity prices. Selgin also found a paper by another Fed official — written just after Volcker stepped down, in 1987 — arguing (apparently unsuccessfully) that the Fed should start adopting a rule such as the one Moore describes. Which, of course, implies that the Fed had not had any such rule when Volcker was in charge.

.. When I first, shall we say, expressed skepticism about Moore’s claim in that CNN debate, he suggested I get things from the horse’s mouth.

MOORE: Do you know what the Volcker Rule was? You know how he killed inflation? He followed commodity prices. Every time commodity prices went up, he — he raised interest rates, and every time —

RAMPELL: That’s not what the Volcker Rule is.

MOORE: Yes, it was. That’s what he did, and that’s how we conquered inflation, and that’s why —

RAMPELL: Google the Volcker Rule, people. That’s not what the Volcker Rule is.

MOORE: Yes, it was. Ask him. Ask him.

So I figured, why not ask Volcker? I sent an inquiry through his book publicist, who passed it along to Volcker’s assistant. The assistant replied: “I showed this to Mr. Volcker and he says that he does not remember ever establishing a commodity-price rule.”

There you have it. Trump has nominated to the world’s most powerful central bank a guy who has trouble telling whether prices are going up or down, and struggles to remember how the most famous Fed chair in history successfully stamped out inflation. But hey, Republican senators still seem keen on him because “the establishment” keeps pointing out how inept he is.

Former Fed Chair Janet Yellen: Far from retired, nowhere near done

The Fed is very close to having satisfied its maximum employment and price stability mandates and you can see that most people feel good about the economy and the Fed.

But it would concern me — President Trump’s comments about Chair Powell and about the Fed do concern me, because if that becomes concerted, I think it does have the impact, especially if conditions in the U.S. for any reason were to deteriorate, it could undermine confidence in the Fed. And I think that that would be a bad thing.

Ryssdal: Do you think the president has a grasp of macroeconomic policy?

Yellen: No, I do not.

Ryssdal: Tell me more.

Yellen: Well, I doubt that he would even be able to say that the Fed’s goals are maximum employment and price stability, which is the goals that Congress have assigned to the Fed. He’s made comments about the Fed having an exchange rate objective in order to support his trade plans, or possibly targeting the U.S. balance of trade. And, you know, I think comments like that shows a lack of understanding of the impact of the Fed on the economy, and appropriate policy goals.

Worry About Debt? Not So Fast, Some Economists Say

U.S. deficits may not matter so much after all—and it might not hurt to expand them for the right reasons

Now, some prominent economists say U.S. deficits don’t matter so much after all, and it might not hurt to expand them in return for beneficial programs such as an infrastructure project.

“The levels of debt we have in the U.S. are not catastrophic,” said Olivier Blanchard, an economist at the Peterson Institute for International Economics. “We clearly can afford more debt if there is a good reason to do it. There’s no reason to panic.”

Mr. Blanchard, also a former IMF chief economist, delivered a lecture at last month’s meeting of the American Economic Association where he called on economists and policymakers to reconsider their views on debt.

The crux of Mr. Blanchard’s argument is that when the interest rate on government borrowing is below the growth rate of the economy, financing the debt should be sustainable.

.. Interest rates will likely remain low in the coming years as the population ages. An aging population borrows and spends less and limits how much firms invest, holding down borrowing costs. That suggests the government will not be faced with an urgent need to shrink the debt.

Mr. Blanchard stops short of arguing that the government should run up its debt indiscriminately. The need to finance higher government debt loads could soak up capital from investors that might otherwise be invested in promising private ventures.

Mr. Rogoff himself is sympathetic. “The U.S. position is very strong at the moment,” he said. “There’s room.”

.. Some left-wing economists go even further by arguing for a new way of thinking about fiscal policy, known as Modern Monetary Theory.

MMT argues that fiscal policy makers are not constrained by their ability to find investors to buy bonds that finance deficits—because the U.S. government can, if necessary, print its own currency to finance deficits or repay bondholders—but by the economy’s ability to support all the additional spending and jobs without shortages and inflation cropping up.

Rather than looking at whether a new policy will add to the deficit, lawmakers should instead consider whether new spending could lead to higher inflation or create dislocation in the economy, said economist Stephanie Kelton, a Stony Brook University professor and former chief economist for Democrats on the Senate Budget Committee.

If the economy has the ability to absorb that spending without boosting price pressures, there’s no need for policy makers to “offset” that spending elsewhere, she said. If price pressures do crop up, policy makers can raise taxes or the Federal Reserve can raise interest rates.

“All we’re saying, the MMT approach, is just to point out that there’s more space,” she said. “We could be richer as a nation if we weren’t so timid in the use of fiscal policy.”

 .. By continuing to run large deficits, says Marc Goldwein, senior vice president at the Committee for a Responsible Federal Budget, the U.S. is slowing wage growth by crowding out private investment, increasing the amount of the budget dedicated to financing the past and putting the country at a small but increased risk of a future fiscal crisis.

Market interest rate signals can be misleading and dangerous. By blessing the U.S. with such low rates now, he says, financial markets just might be “giving us the rope with which to hang ourselves.”

Tucker Carlson Versus Conservatism

The Fox News host amplifies a debate the right needs to have.

The most interesting thing in conservative politics right now is not the government shutdown and Donald Trump’s flailing attempt to claim victory while being defeated on all fronts. Instead it’s an ideological battle over Tucker Carlson’s recent Fox News soliloquy, in which he accused his fellow Republicans of building an anti-family, finance-dominated economic system that might be “the enemy of a healthy society.”

Carlson’s monologue was an expansion of themes that have dominated his reinvention as a Trump-era populist — the general folly of elites, the unwisdom of the bipartisan consensus on immigration and foreign policy, the failure of Republican leaders to defend the national interest.

But in expanding on those themes he went somewhere that Fox hosts rarely go — from culture into economics, from a critique of liberal cosmopolitanism into a critique of libertarianism, from a lament for the decline of the family to an argument that this decline can be laid at the feet of consumer capitalism as well as social liberalism.

Just about every conservative worth reading was provoked into responding.

If there is to be a healthy American right, after Donald Trump or ever, this is the argument that conservatives should be having. And it is especially an argument that Fox News should be highlighting, since Fox is frequently responsible for stoking populism but keeping it vacuous or racialized, evading the debates the right really needs.

Now let me attempt my own quick contribution. A key issue in the Carlson contretemps is distilled in this line from David French of National Review, one of the monologue’s critics: “There are wounds that public policy can’t heal.”

This is a crucial conservative insight, a caution for policymakers everywhere — but it can also become a trap, a cul-de-sac, an excuse for doing nothing. And that has happened too often for conservatives in recent decades: They’ve leaped to despair without even trying policy.

But in hindsight this was wrong, the feared inflation never came, and the economic recovery was slowed because of the Republican fixation on tight money. Of course, in the Trump era some Republicans have conveniently become dovish on inflation. But in the preceding eight years, wage-earning Americans suffered unnecessarily because of a wrongheaded right-wing counsel of despair.

A second example: While it’s true that family breakdown has deep and tangled roots, it’s also true that in the 1940s and 1950s, a mix of government policy, union strength and conservative gender norms established a “family wage” — an income level that enabled a single breadwinner to support a family.

Maybe it isn’t possible to recreate a family wage for a less unionized and more feminist age — but are we sure? Is there really nothing conservatives can do to address

  • the costs of child care,
  • the unfulfilled parental desire to shift to part-time work,
  • the problem that a slightly more reactionary iteration of Elizabeth Warren once dubbed “the two-income trap”?

If marriages and intact families and birthrates declined as the family wage crumbled, perhaps we should try rebuilding that economic foundation before we declare the crisis of the family a wound that policy can’t heal.

A final example: Historically conservatism has been proudly paternalist, favorable to forms of censorship and prohibition for the sake of protecting precisely the private virtues that Carlson’s critics think government can’t cultivate. But in recent decades, the right’s elites have despaired of

  • censoring pornography, acquiesced to the spread of
  • casino gambling, made peace with the
  • creeping commercialization of marijuana, and accepted the
  • internet’s conquest of childhood and adolescence.

Yet none of these trends actually seem entirely beyond the influence of regulation. It’s just that conservatism has given up — once again, in unwarranted despair — on earlier assumptions about how public paternalism can encourage private virtue.

The deeper point here is that public policy is rarely a cure-all, but it can often be a corrective. And the part of Carlson’s monologue his critics should especially ponder is the end, when he suggests that absent a corrective that “protects normal families,” even the normal will eventually turn to socialism — choosing a left-wing overcorrection over a right that just says, Well, you see, we already cut corporate taxes, so there’s nothing we can do.