Tyler Cowen and Fiat-Money Independent Central Banks

A Benjamin Cole post

The globe’s major fiat-money central banks are considered “independent,” those being the Bank of Japan, the U.S. Federal Reserve and the European Central Bank.

The ostensible reason for the independent status is so that central bankers can “do the right thing” and not cave in to political or popular demands, almost invariably described as “printing money.”

But if inflation everywhere and always is a monetary phenomenon, then so too must be disinflation and deflation. After obtaining the former in the 1980-1990, the major central banks have obtained the latter in the late 2000s over much of the globe, and the U.S. is but one recession away from deflation also.

Tyler Cowen

Tyler Cowen, the brilliant blogging polymath from George Mason, recently posited it is politics and the labor class that is pushing the Fed to chronic tight-money, in his recent and welcome endorsement of nominal GDP level targeting by central banks, or NGDPLT.

By Cowen’s reckoning, the central banks are independent, except they are cowed by a working class that does not want to see wage cuts through inflation.

Does the AFL-CIO stand athwart of Fed desires for NGDPLT, and the attendant moderate rates of inflation?

Rather…

I rather suspect it is strident right-wing academia, think-tankers, punditry and bloggers, and related party politics that have contorted an eagerly compliant Fed into a supine posture now conducive to a deflationary perma-recession.

It is rare to see true happiness in this world, but the beam on a central banker’s face when announcing a rate-hike is the best place to look.

The Fed has leaned to deflation for decades, and is on the doorstep now. It is benighted, second-rate mythology that the Fed has been “easy” or “held rates low.” If the Fed has been easy, how to explain the 35-year decline in inflation and interest rates?

Conclusion

Glad we are to accept a Tyler Cowen into the NGDPLT camp. Maybe for politesse, Cowen must identify the anti-inflation zealots as laborites. So be it.

There is still a real danger to American prosperity, even if the Fed adopts NGDPLT, and that is the Fedsters will select a straitjacket tight version of NGDPLT, or chronically miss LT on the low side, as they do with the IT (inflation targeting).

The idea of an independent fiat-money central bank may be proving a bad one. In the modern-era, such institutions generally asphyxiate economic growth.

3 thoughts on “Tyler Cowen and Fiat-Money Independent Central Banks

  1. Labor is not the source of opposition to NGDPLT. After all NGDPLT can be paraphrased as targeting Income growth, which any and all labor is in favor of. And I’m not sure when the Fed ever really gave a damn about Labor. Your own list of suspects is far more likely. And I would add banks and other major creditors to your list.

    • Jerry Brown: thanks for reading. Perhaps if we Define NGDPLT as “anti-labor” it will have a chance to pass muster with America’s right wing.

      • Perhaps with the dumb ones. The smart right wing that already has their money wants their money to appreciate in value, or at the worst maintain its value through entirely safe government bonds. Not to possibly depreciate so that an average citizen’s nominal income can increase at some target rate. I doubt there is a way to convince the hard money types. I say let them buy gold and otherwise ignore them.

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