William Brainard worked out one answer. With just a little bit of math, he looked at a situation where a policymaker was trying to reach some policy target by pushing on one particular policy lever. Perhaps it's the central bank trying to reach a GDP target over the next two years by setting short term interest rates, perhaps it's a doctor trying to reach a blood pressure target by prescribing a medicine, perhaps it's a dictatorial economic reformer trying to decide how many reforms to enact.

In all these cases, the more the policymaker does, the more uncertain she probably is about the effect of her actions. Experts have a lot of experience raising or lowering interest rates by half a percent so they have a sense of what happens afterward. But they have little recent experience cutting rates by 8 percent in a year in the rich countries. The same is true with blood pressure and economic reforms--experts know a lot about how tinkering works and have a tougher time guessing the effects of bigger changes.

So in many policymaking situations, more action means more uncertainty about the effects of the action. And if your goal is to be close to your target, then more uncertainty is a genuine cost of taking more action.

Hence, Brainard's Conservatism Principle. Alan Blinder, formerly vice chair of the Fed, summed the Brainard Conservatism Principle this way when he applied it to monetary policy:

Estimate how much you need to tighten or loosen monetary policy to "get it right." Then do less.

Why do less? Why isn't the best strategy for hitting the target to try to hit the target? Because more action creates more uncertainty, and you face a real tradeoff.

Extreme versions of this idea turn up in economics and politics from time to time. When the drunk looks for "keys under the lampost" he's taking the certain, low-risk path. When people say "Don't just do something, stand there," they are often noting that people who try to fix problems often create problems of their own. The Brainard Principle shares in those pieces of wisdom but sticks to cases where action is a continuum, where there are a range of options. And it tells us that whatever plain common sense recommends, we probably should do less.

Lessons:

1. If William Tell had been placed further away from his son, he would have aimed higher.

2. It's prudent to try out medium-size quantitative easing if the Fed doesn't know much about how QE works in large quantities.

3. When the Hulk shakes hands with people, most folks come away saying, "Gosh, that seemed like a pretty weak handshake." Also true for the teenage Clark Kent.

Yes, part of the reason to "do less now" when trying out new superpowers like QE is because you can try again later. But even if you only get one shot, Brainard proved that in some cases it's wise to pull your punches.

Humans, we don't know our own strength.

Coda: This is my last day here at EconLog, and I want to thank my co-bloggers Bryan and David for helping to make this such a rewarding experience, and I look forward to reading Art's posts over the coming months. EconLog is a great intellectual environment, I hope it continues for many, many years to come.

I will continue tweeting, so feel to follow: @GarettJones.

This system, where no bank pays more than the discount rate to borrow funds and earns no less than the interest rate paid on excess reserves to lend funds is known as a "channel system" or "corridor system" of monetary policy. The Fed's lending and borrowing rates pin down a corridor, and short-term rates typically stay within that corridor. Why pay more than the Fed's rates to borrow? Why earn less then the Fed's rates when lending? The corridor sets rates in the safe-return market.

The rise of the channel/corridor system is one reason I suspect that it's reasonably fair to think that under our current policy regime the short term interest rate is an instrument. As David correctly notes, the Federal Reserve does buy and sell government bonds in order to influence short term interest rates. It's possible that this channel is still crucial, I don't claim to know whether it still is. But I do know that our Fed uses the rate on excess reserves as one instrument of monetary policy and uses the slightly higher discount rate as another instrument of monetary policy; together they do a lot to pin down our new corridor system of short term interest rates.

Fun Fact: There's evidence that even before the rise of the corridor approach, central banks could sometimes move short-term interest rates without buying or selling government bonds. Central banks could move interest rates just by announcing their new target.

This approach is known as "open mouth operations"; Guthrie and Wright had a nice paper in the Journal of Monetary Economics showing how open mouth operations worked in New Zealand: Rates routinely moved to where the head of the central bank told them to move without any change in bank reserves. The St. Louis Fed has a one-pager on a Swiss example as well. So sometimes you don't need to buy bonds to cut interest rates, sometimes you don't need to sell bonds to raise them.

In my dissertation I attempted to find evidence of open mouth operations in the U.S. Yes, I did find some evidence, but just as in the Swiss case, it was a "sometimes" situation: Sometimes the Fed bought a lot of bonds when it wanted to cut rates, and sometimes it didn't. A noisy relationship--the kind that central bankers can discuss amongst themselves but which leads to an empirical muddle. Some interesting ideas are difficult to test, and I'd like to think that the theory of open mouth operations falls into that category....

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!

1. The Onion reports Hillary Clinton's thoughts on whether she should run for President (questionable language):

...while I can't definitively say what my plans are one way or another, I can say that, at this point in my life, I'm strongly weighing whether or not I want to endure the absolute hell of appealing to you mindless, dumb-as-dirt simpletons again.

2. In Shakespeare's Coriolanus, a military hero pushed into running for office can't bring himself to pretend to be one of the people--his well-deserved pride gets in the way. He launches into a tirade in front of the voters; his words are more eloquent that that of the typical U.S. senator, but I imagine more than one senator has felt the same way:

You common cry of curs! whose breath I hate/As reek o' the rotten fens, whose loves I prize/As the dead carcasses of unburied men....

Then he complains to the voters, criticizing

Your ignorance, which finds not till it feels...

Coriolanus apparently thought there were lots of intuitionists out there among the voters.

The fictionalized HRC and Coriolanus both think that voters aren't all that rational, all that informed. And both think that it is beneath their dignity to act like commoners just to get elected. HRC doesn't want to drink beer with the guys; Coriolanus didn't want to (as another Shakespeare character put it)...

strip his sleeves and show his scars. And say 'these wounds I had'

...defending Rome's freedom. The candidate's quest for dignity, the candidate's rejection of egalitarianism, raises the cost of running for office.

And in modern politics, the demands for public egalitarianism are incessant. France's gauche caviar scandal is the latest: Hollande's former budget minister turned out to have a hidden Swiss bank account. Part of the scandal is the tax avoidance, part of it is that it shows he's not one of us, he's a rich guy.

All of these demands for equality get in the way of good government. That's a theme in Coriolanus, and it's a theme in economic theory. Economists usually think people should be paid in some kind of proportion to the value they create. But how much extra value does a great finance minister create compared to a mediocre alternative? France is a two trillion dollar economy, so if she raises economic growth per year by a mere one thousandth of one percent (0.001%), she would create $20 million in value each year she stays in office. And I don't think it's outlandish to believe that the best possible finance minister could raise France's GDP by two or three times that amount.

While you and I might disagree on who's a good choice for finance minister and who isn't, we can all agree that it would be easier to get a better shortlist for the job of finance minister if the job paid $20 million a year and it didn't require you to drive a Citroen while you were in office.

Crazy, you might say, no nation with a modicum of democracy could pay top officials like that, you might say, and if they did it would lead to corruption, you might say. In some cases you'd be right, but one nation with a modicum of democracy (I make no claims beyond the modicum) pays its top officials just under a million dollars a year and seems to get good results with relatively low corruption: Singapore. Quoting Bloomberg, though Wikipedia has more:

New ministers will make about S$1.1 million [$0.9 million US], down from S$1.58 million...

And note this embrace of elitism with just a dash of egalitarianism:

The salary of a new minister will now be benchmarked to the median income of the top 1,000 earners who are Singapore citizens and with a 40 percent discount "to signify the ethos and sacrifice that comes with political service..."

There's some evidence that when it comes to politician quality, you get what you pay for; Besley finds that higher pay for U.S. governors predicts governors with more experience in politics, and Ferraz and Finan look at Brazilian data and find a slower revolving door and better educated politicians in regions where politicians get better pay. But alas the egalitarian ethos in democracies makes it difficult to raise the pay of politicians.

The voters' love of egalitarianism is expensive.

Coda: This is my last full week guest blogging here at EconLog; I'm here through the end of April. It's been a wonderful experience, and I want to thank my readers and my co-bloggers for making it so rewarding, and to thank the excellent Arnold Kling and the good people of Liberty Fund for creating EconLog and making it such a vibrant place for candidly discussing free market economics.

My big project over the next year is finishing my book Hive Mind: How Your Nation's IQ Matters So Much More Than Your Own. It's under contract with Stanford University Press with tentative plans for release in Fall 2014; I discuss some of the big ideas behind the book in this article (PDF). Stanford has published two other books by my GMU colleague Chris Coyne, do take a look.

To the task at hand: A while ago I wrote on how "Capital should be untaxed" should be the default view in economics: Zero capital taxation should be the starting point for future discussions among serious people, it should be taught in principles courses. Interfluidity wrote a valuable critique, read the whole thing. I'm here to emphasize two claims he discusses:

1. If the real world has increasing returns to scale--if doubling inputs more than doubles outputs--then rational workers would want to subsidize capital rather than tax it (Short wonkish PDF, page 4).

2. If in the real world some workers can become productive from accumulating human capital, then perhaps capitalists (and workers who aren't good at building up human capital) would rationally want to treat human capital as, well, capital, and leave it untaxed. In practice this would probably mean taxing high wage-earners at lower rates than low wage-earners: If high wages are mostly caused by human capital we want to ensure that there are good incentives to accumulate human capital.

Both of these ideas have the same implication: Given a few basic assumptions, if there are workers who are unable to accumulate human and physical capital themselves, and if these workers are wise, these workers would gladly tax themselves to pay the cost of government, and they might even gladly tax themselves to subsidize the growth of capital.

If I'm a worker who can't accumulate human or physical capital to make myself more productive, I crave opportunities to at least use such capital in my job. And one rational way to satisfy that craving is to make a lot of sacrifices so that everyone around me has an incentive to accumulate physical and human capital.

So once we make the Chamley-Judd zero capital taxation result a bit more realistic, once we make it sound more like the real world, we find that regressive taxation looks a bit better than before. It's not that all signs point in the direction of regressive taxation--as Interfluidity and I both note, some tweaks of the model support progressive taxation, some support regressive taxation. But if the reality-based community cares about the well-being of people who don't have great skill at accumulating human and physicial capital then they should use zero capital taxation as their starting point.

There are sound arguments for positive capital taxation, sound arguments for negative capital taxation. Let's start with zero and go from there.

Coda: To quote Interfluidity:

...those of us who support redistributive taxation don't believe that the world works in the way that Chamley and Judd assume...

The Portuguese government is considering a plan to pay public workers and pensioners one month of their salary in treasury bills rather than cash after a high court ruled out wage cuts...

"...the resulting deficits will be an effective restraint on the spending propensities of the executive branch and the legislature..."

Myra Beams, a realtor in Tamarac, Fla., said half of her foreclosed properties, regardless of the price range, have been vandalized by the former owners. "I think the former owners are angry, and for some reason, they think they're entitled to destroy properties," said Beams. "I guess they're angry at the banks for giving them the mortgage."

"The pour-concrete-down-the-toilet trick is one that most good [home] inspectors know to look for."

...Baseboards, appliances and a brick pathway completely removed....Cement poured down toilets.....Then, there's the one about a slew of dead fish left to rot in an attic.

...embittered homeowners have stripped out appliances, punched holes in walls, dumped paint on carpets and, as a parting gift, locked their pets inside to wreak further havoc. Real-estate agents estimate that about half of foreclosed properties to be sold by mortgage companies nationwide have "substantial" damage...

Two Cyprus narratives: 1. Stupid justice-driven elites vs. financial stability.  2. 'If not now, when?' vs. hyperbolic discounters.

Some people tell me a US sovereign default is inevitable. If so, we should be borrowing a lot more.  #ZeroTax

Twitter means never having to say you're thorough.

The standard "classic" result in this field is, in fact, that an optimal system would have no taxation of investment income. 

That's a bit of an exotic argument, but if you want to undermine the standard approach there you have it. 

Under standard, pretty flexible assumptions, it's impossible to tax capitalists, give the money to workers, and raise the total long-run income of workers.