Sometimes doing little, or perhaps even nothing, can go a long way
From the August 2017 print edition
As I sit here in front of my word processor, it is about nine months since Donald Trump was elected
President of the United States of America. And the last time I checked, the sky hadn’t fallen…at least, not yet. This is very different from some of the very dire predictions that I heard after the electoral votes were counted. There was a gaggle of commentators who virtually guaranteed that the stock market would crash. Last time I looked, it was up a very healthy 17.5 percent. And if there has been one defining element of the Trump presidency, it is that he hasn’t done anything.
Recall the lynchpin promises of his campaign. First, he would build a wall with Mexico to end the tide of illegal immigration. Second, Obamacare would be repealed and replaced with a healthcare system that would allow Americans to keep their own doctors, a system where there would be increased access combined with lower costs, a system…You get the idea. And tax relief! Millions of Americans would cease paying any income tax at all. Wealthier Americans would see billions of dollars returned to their rightful owners, and the usurious penalties on corporate profits would fast become a thing of the past.
Not a single promise has been kept, yet that doesn’t seem to be impacting the economy in the slightest. Maybe what the government does…or doesn’t do…isn’t that important, after all.
Over the years, the public has been led to believe that one of the most important determinants of sound economic growth is finding the appropriate level of interest rates at any one time. If you recall the fairy tale Goldilocks and the Three Bears, you understand the gist. If interest rates are too high (hot), that’s no good. If they’re too low (cold), that’s not right either. There’s something in the middle that is “just right.”
The way that central bankers—including those in both Canada and the US—have been finding “just right” is through the application of something called the Taylor Rule. It’s named after Robert Taylor, an economist who teaches at highly respected Stanford University. The Taylor rule goes something like this.
There is a “just right” interest rate that has to be adjusted, depending on what is happening with inflation and real economic growth. If inflation is higher than it should be, that “just right” interest rate should be bumped up to cool things off. If real economic growth is lower than it should be, that “just right” interest rate should be shaved to stimulate things. It’s a framework that seems to make sense at first glance, but implicit in it is that everyone agrees on what “just right” is.
Imagine the following. You think “just right” is two percent, while I think that just right is three percent. And it just so happens that interest rates stand at 2.5 percent. You would be looking to cut interest rates while I would be looking to increase them. The Taylor Rule and the framework itself is meaningless, unless there is agreement about the “just right” interest rate.
Now here’s what we’ve learned in the past few months: No one on the Federal Reserve Board (the committee in the US responsible for setting interest rates) seems to have the confidence to step forward and say what “just right” means. What does that mean? It means that those who in charge of interest rate policy are as good as shooting at an invisible target.
Therefore, no one really knows what they’re doing when it comes to setting interest rate policy, yet it doesn’t seem to be impacting the economy in the slightest. Maybe what the Central Bank does…or doesn’t do…isn’t that important after all.
There are some readers who may be concerned because what this suggests is that the economic ship is rudderless. But I find this strangely encouraging—and it gives us a very good idea of the way forward. In a more-or-less free and open economy, our natural inclinations will lead many of us—not all of us, but enough—to self-interestedly produce goods and services of real value. Then in free and open exchange, that productive output will be traded for other goods and services of real value produced by others, creating a win-win for all parties. And then all we really need from government is that it establishes clear, transparent rules and enforces them quickly and even-handedly. And because the belief system that we call money makes voluntary exchange possible, we need central banks that control the manufacture of fiat currencies, so profit-maximizing actors will be properly rewarded for the value that they have created.
So perhaps, as it turns out, public policy isn’t irrelevant—it’s relevant precisely to the extent that it does less, rather than more