Manuel Suárez Mier
The global economic crisis caused to some extent by the pandemic has generated totally deranged economic policy proposals. Here I analyze those that have been presented in monetary policy.
The world economic crisis caused to some extent by the pandemic that shut down a good part of the productive activities, added to the global revolt against the police abuse of racial minorities, especially blacks, has generated totally unhinged economic policy proposals.
The latest, written by “progressive” US women senators, with Elizabeth Warren (a) Pocahontas[1] as their leader, proposes to broaden the objectives of the central bank, the Fed, which today are to keep inflation under control and maximize employment, to include the reduction of racial inequality.
The initiative, entitled the Federal Reserve Racial and Economic Equity Act, would require the central bank to take steps “to minimize and eliminate racial disparities in employment, wages, wealth, and access to affordable credit,” although it does not specify how the monetary authority would achieve that goal.
This initiative supported by 21 senators has no chance of passing the full, Republican-dominated Senate. Even if they lose control of the Senate in the November election, it seems remote that such an absurd idea will pass, but there are already others like it.
Presidential candidate Joe Biden, who no one considered a radical, formulated related if less extreme ideas, calling for the Fed to “add to the responsibility it already has to maximize employment by aggressively attacking persistent racial gaps in wages, jobs and wealth.”
These proposals fail to consider that the Fed lacks the toolkit to achieve racial equality, just as it lacks the toolkit to minimize unemployment, because it has only one autonomous instrument, which is monetary policy, so it can devote itself to but one goal, price stability.[2]
The schizophrenic proposals in radical monetary policy go beyond this one, and include the so-called “new monetary policy,” which we have already commented on in this column, but which now appear with a new halo of respectability since reputable publications such as The Economist, dedicates its cover to them and gives them a level of credibility comparable to that of serious schools of thought.
“The new era,” as the magazine calls it, “whose primary concern is to exploit the opportunities and contain the enormous risks that come from a gigantic level of state intervention in the economy and financial markets,” consists of more deficit spending by printing money.
Its four characteristics are: enormous public indebtedness financed by the creation of cash, resulting in very low interest rates, with the State allocating financial resources to productive activities at will, all this in a climate of low inflation, which, in turn, allows low rates to prevail.
Deus-ex-machina, they have found the magic recipe that will solve all problems, except that we have already seen this movie and we know how it ends: in a staggering debacle, with inflation, misery and greater inequality.
[1] In her 2012 Senate campaign, it came to light that Warren had supported her academic career by affirming her Native American ancestry, thereby taking advantage of the benefits granted to ethnic minorities.
[2] Tinbergen and Mundell proved that independent economic policy objectives require not only the same number of independent instruments, but pairing them with the objectives for which they are most effective.
*This column was originally published in Spanish by Excélsior on August 14, 2020.