Want to know how to win a gold medal in Rio in 2016? Here's a guaranteed plan to reach the top spot on the podium:
1. Qualify for an Olympic event.
2. Do better than every other competitor.
That's it! There's your path to victory. If you find an error in my guaranteed foolproof advice, do let me know.
One of the big problems with monetary policy is that a lot of the advice economists give to governments is just as true and just as useless as my foolproof two step plan. Milton Friedman, wise on many topics, ran into this problem when he recommended growing the broad money supply--checking accounts, savings accounts, currency--at a fixed percentage rate every year.
How, exactly, is the Federal Reserve supposed to do that? They could do it the way that Dr. Evil might try to win a gold medal---trickery, violence and threats of violence--but that's not the kind of success we're talking about. We're asking how does a central banker use the small set of tools she understands---buying and selling government bonds, setting a short-term interest rate--to achieve the very distant goal of growing the entire stock of readily spendable wealth by 3% per year? Isn't every link in this chain of causation a loose joint, a squishy steering wheel, an uncertain outcome?
It's nice to have a goal, and it's better to have good goals than bad goals, but good policy requires more than goals: Good policy requires an action plan.
This is known as the "instruments versus targets" distinction in macroeconomics, and it pays to make the distinction clear. One reason John Taylor's rule for setting short-term interest rates swept the field of macroeconomics is because it told central bankers exactly what to do with the instruments that central bankers actually use and understand. Taylor didn't say "do good things, don't do bad things," he said, "If inflation falls 1% cut the short term rate by 1.5%". Practical advice, not a noble goal.
The new Evans Rule for monetary policy is similarly practical, it goes something like this: "As long as inflation is less than 2.5% and the unemployment rate is above 6.5%, keep the short term interest rates at near-zero. Actually, keep it there a little longer than that." The Fed's hope is presumably that this rule achieves good policy goals, just like "Wake up at 6 M-F, bike 10 miles in under 40 minutes" might be good advice for someone trying to stay in shape.
One can be extremely confident when giving goal-based advice because it's always right. When you switch to giving instrument-based advice--when you switch from cheerleading to playing the game--you have to warn your audience that Your Mileage May Vary, that there's many a slip 'twixt cup and lip.
Me, I'll just stick to my foolproof plans.
Next up: My foolproof one-step plan to quit smoking!