Thursday, September 27, 2007

How Effective Has Monetary Policy Been?

How Effective Has Monetary Policy Been?

How Effective Has Monetary Policy Been?

ST. LOUIS, Sept. 27 /PRNewswire/ -- Central banks that have a specific,numeric target for inflation appear to have a good record of hitting those targets, but an analysis from the Federal Reserve Bank of St. Louis suggests that such targets may not be a prerequisite for achieving low and stable inflation.

The analysis was conducted by Marcela M. Williams, a senior research associate, and Robert H. Rasche, a senior vice president and director of research at the Federal Reserve Bank of St. Louis. Their research appears in the September/October issue of Review, the Reserve Bank's bimonthly journal of economic and business issues. The publication is also available online at the St. Louis Fed's web site:

Williams and Rasche looked at 23 inflation-targeting countries and measured the moving average of their inflation rates. Generally speaking,they found these countries have been quite successful at keeping their long-term inflation rates within their target ranges. The most successful in meeting their targets are New Zealand, Norway, Switzerland, Thailand and the United Kingdom, which have all maintained an average inflation rate well within their target ranges, even before those ranges were explicitly defined. The exceptions are Brazil, Mexico and the
Philippines, while some countries, such as Chile, Colombia and Hungary have
been able to bring their inflation rates down over time.

To assess the disposition on the subject by members of the Federal Open Market Committee (FOMC), Williams and Rasche compiled transcripts and public statements of various Fed officials and FOMC members for the past decade or so.

Although the Fed does not set an explicit inflation target, some Fed officials have publicly stated their preference for doing so, including Governor Ben Bernanke, Dallas Fed President Jeffrey Lacker, San Francisco Fed President Janet Yellen and Philadelphia Fed President Anthony Santomero. Williams and Rasche describe St. Louis Fed President William Poole's statements regarding explicit inflation targets as "ambivalent."

Governor Donald Kohn, among others, has expressed opposition to an inflation target for the central bank.

Williams and Rasche emphasized that that the Fed's success over the past two decades in stabilizing the inflation rate without using explicit inflation targets would seem to question the marginal benefit of targeting,at least in the United States.

In addition, they surveyed historical research and commentaries to examine why evidence of the effects of monetary policy on output stabilization are so elusive. While a number of studies show the contractionary effects of monetary policy, results from econometric models often conflict with historical evidence, and economists debate how to reconcile those discrepancies.

Finally, Williams and Rasche concluded that the case for consistently effective short-run monetary stabilization policies is problematic because there are just too much uncertainties in the environment in which central banks operate.

With branches in Little Rock, Louisville and Memphis, the Federal Reserve Bank of St. Louis serves the Eighth Federal Reserve District, which includes all of Arkansas, eastern Missouri, southern Indiana, southern Illinois, western Kentucky, western Tennessee and northern Mississippi. The St. Louis Fed is one of 12 regional Reserve Banks that, along with the Board of Governors in Washington, D.C., comprise the Federal Reserve System. As the nation's central bank, the Federal Reserve System formulates U.S. monetary policy, regulates state-chartered member banks and bank
holding companies, and provides payment services to financial institutions and the U.S. government.

Tuesday, September 25, 2007

Oberstar: We need more investment, more modes, less congestion

The following commentary appeared in the Sept. 23 issue of the St. Paul Pioneer Press.

By Rep. James Oberstar

The history of transportation is full of skeptics who have stood in the way of progress. Ranging from those who thought a ship would sail off the edge of the Earth to critics who proclaimed that if man were meant to fly he would have wings, these skeptics have been proven wrong throughout the ages.

I count the National Taxpayers Union (NTU) as one such group of naysayers ("Building bridges: don't raise taxes" Sept. 17). NTU has been a persistent critic of public transportation, light rail, commuter rail and even bike and foot paths. They claim all of these modes of transportation are draining tax dollars needed to fund their preferred mode of transportation: freeways.

NTU is stuck in the past, vainly hoping that adding a few more lanes on a freeway system that was designed in the late 1950s and built in the 1960s will keep pace with the transportation needs of the 21st century. However, our economy has grown far beyond the ability of any single mode of transportation to move all of our nation's people and products.

NTU is also wrong to claim that funding levels for transportation are adequate. In the last federal highway aid bill the U.S. Department of Transportation recommended spending $375 billion over six years to maintain our roads and bridges and keep up with congestion. Instead, the president used the threat of a veto to hold the amount of our investment to $286 billion, nearly $90 billion short of the figure his own administration recommended.

Our nation has 73,784 structurally deficient bridges on the national highway system. Congestion on our freeways is growing faster than we can keep up with. According to a report this past week by Texas AM University's Texas Transportation Institute, the average Minnesotan sits in traffic 43 hours a year, burning 30 extra gallons of gas. In effect, this wasted fuel and time levies a $78 billion-a-year congestion tax nationwide, on drivers and businesses. Freeway congestion costs Minnesota's economy $1.1 billion a year. We cannot afford to continue under-investing in our transportation infrastructure.

Congestion is not just limited to our freeways. Right now it takes a cargo container, arriving on our West Coast, 40 hours to travel 1,800 miles to Chicago. It then takes another 36 hours to travel the next seven miles through Chicago's rail yards. We need to make major investments in our nation's freight and passenger rail systems.

The amount of freight being shipped on our nation's rails and roads has increased dramatically in the past two decades. Our economy now calls for just-in-time delivery of goods, making many of the trucks on our highways rolling warehouses, as they move products to market.

Another way to relieve some of the pressure from our highways and railways is to develop a new form of shipping altogether. Short sea shipping would call for the creation of new cargo vessels that move up and down the nation's four coasts. I authored and the House passed legislation to create subsidized loans for the shipping industry to design and build this new class of energy efficient cargo vessels, for the Great Lakes and the salt-water coasts.

If we make the needed investments in technology and research, our nation's transportation system in the 21st century will be multi-modal. Freight containers will move seamlessly from factory to truck, to train, to ship, finding the most cost-effective route to the marketplace. Commuters will be able to walk or bike to a train station to go to work. Our freeways will be upgraded to allow for greater capacity and more efficient flow of traffic. American innovation and new transportation technologies will make gridlock a thing of the past.

The NTU and other skeptics are not looking at the big picture. They have to look through their bug-spattered windshields and past the bumper of the car they are stuck behind in traffic to see that our nation needs a diverse, inter-modal transportation system to serve the needs of 21st century America.

Rep. Jim Oberstar represents Minnesota's 8th Congressional District in the U.S. House of Representatives and is chairman of the Transportation and Infrastructure Committee.

Bush: Not Fixing Social Security Not Fair

From the Associated Press (9/24):

Bush: Not fixing Social Security not fair

Treasury report recommends benefit cuts, tax increases to fix funding shortfall


WASHINGTON - The Bush administration said in a new report Monday that Social Security is facing a $13.6 trillion shortfall and delaying needed reforms is not fair to younger workers.

A report issued by the Treasury Department said some combination of benefit cuts and tax increases will need to be considered to permanently fix the funding shortfall. But White House officials stressed President Bush remains opposed to raising taxes.

The Treasury report put the cost of the gap between what Social Security is expected to need to pay out in benefits and what it will raise in payroll taxes in coming years at $13.6 trillion.

It said delaying necessary changes reduces the number of people available to share in the resulting burden and is unfair to younger workers. "Not taking action is thus unfair to future generations. This is a significant cost of delay," the report said.

In another key finding, the report said: "Social Security can be made permanently solvent only by reducing the present value of scheduled benefits and/or increasing the present value of scheduled tax increases."

The paper went on to say: "Other changes to the program might be desirable, but only these changes can restore solvency permanently."

While the Treasury report language seemed to indicate the administration would consider raising taxes along with reducing benefits as a way to deal with the funding shortfall, the White House was quick to reject that possibility.

"The president is not advocating for tax increases or benefit cuts," said White House spokesman Tony Fratto.

"Everyone understands that the choices available in the current structure of Social Security, that absent reform, tax increases and benefit cuts are inevitable," Fratto said. "That's why the president believes it makes more sense to reform the program sooner than later."

Treasury Secretary Henry Paulson, Bush's point person on Social Security reform, said he has had a number of discussions with members of Congress from both parties over the issue of fixing the problems in Social Security with the looming retirement of 78 million baby boomers.

"The administration's new report is a reminder of President Bush's determination to not only privatize Social Security but to make deep cuts in the benefits that American workers have earned," said Senate Majority Leader Harry Reid, D-Nev. "Nobody should be fooled into believing that the only way to save Social Security is to destroy it with privatization or deep benefit cuts."

Bush had hoped to make Social Security reform the top domestic priority of his second term. Bush put forward a Social Security reform plan in 2005 that focused on creation of private accounts for younger workers but that proposal never came up for a vote in Congress, with Democrats heavily opposed and few Republicans embracing the idea.

While Democrats have fought to protect current benefit levels, Republicans have been adamant that taxes should not be raised to cover the Social Security shortfall.

Phil Swaigel, Treasury's assistant secretary for economic policy, told reporters the plan was to release about six issue briefs on Social Security over the next three months. But he said it was "unclear" at the moment whether the papers would lead to a new push to get an overhaul program through Congress next year.

Many believe such an effort would be unlikely to gain success in 2008, a presidential election year when one-third of the Senate and all House members also will be facing re-election.

Paulson, however, has said even if he is not able to achieve an agreement during the short time the current administration will be in office, he hopes to lay the groundwork for the next administration and a new Congress to tackle the problem.

Sunday, September 23, 2007

Bush can't be Keynesian supply-sider

The following appeared in the Sept. 23, 2007 issue of the St. Paul Pioneer Press and was written by Ed Lotterman. A link to the story may be found here.

It is too bad the Old Testament prophet Elijah never passed through Washington, D.C. His challenge to the Israelites in 1 Kings 18, "Choose ye this day whom ye will serve," is a powerful argument against holding two diametrically opposed positions at the same time. Unfortunately, that is a common occurrence in our nation's capital.

Confusion is evident in the White House response to Alan Greenspan's criticism of administration fiscal policies. Defending President Bush, Press Secretary Dana Perino said, "in late 2000, we were headed into a recession, and tax cuts were the prescribed remedy."

Perino is correct. Tax cuts are a prescribed remedy for a recession - if you are a Keynesian. But George W. Bush did not run for office as a Keynesian. He ran as a supply-sider. Supply-side economists are the most diametrically opposed to Keynes of any school of economic thought. The very name "supply-side" is a rejection of the demand-side jockeying John Maynard Keynes advocated.

Supply-side economists argued that trying to micro-manage an economy by manipulating consumer spending was short-sighted and counterproductive. Keynesian tromping of economic gas and brake pedals to regulate demand harms rather than hurts, they said.

Focus instead on the supply side of the economy, they argued. Reduce regulation of economic activity. Increase incentives for saving and investment. That means lowering high marginal income tax rates and taxes on investment earnings from interest, dividends and capital gains. The object is to increase investment. That requires more savings and, thus, less current consumption.

That was the platform on which George W. Bush ran for office in 2000 and was his rationale for tax cuts in 2001. But by the 2004 election, his arguments had changed. Cutting taxes was needed to spur household consumption. That is back to pure Keynesianism.

The problem is that if you cut taxes to spur demand because the economy faces recession, you have to raise them to curtail demand when it really gets rolling. That should have happened two years ago, but the administration showed no willingness to implement the other half of Keynes' prescription.

Just as ancient Israelites could follow Yahweh or Baal, you can be a Keynesian or a supply-sider. But you cannot be both.

Confused economic policy is not original to the Bush administration.

Jimmy Carter's economic advisers were dyed-in-the-wool Keynesians.

But the Carter White house never could decide if it needed to spur the economy to lower unemployment or retard it to cut inflation.

We ended up with the worst combination of both inflation and unemployment in decades.

AP - Bank runs here unlikely thanks to FDIC

Bank runs here unlikely thanks to FDIC

Sept. 23, 2007 (AP) - For many Americans born after the Depression, bank runs are just scenes out of movies like "It's a Wonderful Life."

The troubles at British lender Northern Rock PLC show they can still happen, but it's much less likely that Americans will be seen queuing up outside banks anytime soon to collect their cash as British depositors have this week. The U.S. banking system has different rules and procedures than its U.K. counterpart to guarantee the nation's $4.2 trillion in insured deposits are backed by the government.

Americans can get spooked like anyone else - when the U.S. lender Countrywide Financial Corp. acknowledged sharp losses in its mortgage business, customers packed its bank branches and jammed its online operations, trying to get answers and cash out.

The United States has seen nothing in decades like the billions of dollars Britons have withdrawn from banks in recent days, however.

The reason is largely that the Federal Deposit Insurance Corp. guarantees up to $100,000 per account per bank, and $250,000 for retirement accounts. In Britain, the government guarantees all deposits below 2,000 pounds ($4,000), 90 percent of deposits up to 35,000 pounds ($70,000), and nothing above that.

Furthermore, in the United States, even deposits beyond the $100,000 limit are probably safe, given the Federal Reserve has procedures to keep banks solvent.

The chance of a run on a U.S. bank is "almost nil," according to Richard Bove, a bank analyst at Punk Ziegel & Co. He added that Fed Chairman Ben Bernanke has repeated that he's willing to rescue the banking system.

U.S. bank runs are possible, as the brief panic over Countrywide suggested. But even if one happens, U.S. depositors shouldn't fret too much about losing their shirts.

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