The Fed can’t do it all

In this post, I want to clip together a few different threads about central banks and inflation–and specifically the idea of how you might fight inflation beyond interest rates.

In my new project, Nonrival (a full post about that later but sign up!), I covered the Bank of England this week.

I wrote:

Central banks, for all their faults, have mostly spent the last 15 years trying to do their jobs. Legislators have frequently made those jobs harder, including by embracing austerity in the 2010s. But central banks can only do so much—to boost an economy, or even to fight inflation. At some point investors start to ask: What about the other guys?

Today Ezra Klein goes in a similar direction:

Inflation is a scourge, but interest rates are a blunt tool… I’m more interested in another feature of the progressive consumption tax: the ability to dial it up and down to respond to different economic conditions. In a time of recession, we could drop taxes on new spending, giving the rich and poor alike more reason to spend. In times of inflation, we could raise taxes on new spending, particularly among the wealthy, giving them a concrete reason to cut back immediately and to save and invest more at the same time.

In August, Joe Stiglitz and Anton Korinek put out a whitepaper arguing that monetary policy was being asked to do too much in stabilizing the business cycle.

And at Vox, Emily Stewart interviews Nathan Tankus about whether the Fed is really able to tackle inflation on its own. (I don’t love the “is the Fed a scam” framing but there are some really interesting ideas covered here):

Part of our issue is that we haven’t had other agencies who have been explicitly given the task to think about inflation, to preemptively respond to problems that could potentially cause inflation… We’ve been sold this lie that we can give this one agency responsibility for managing the economy, inoculated from politics, and then it’ll work out best for everyone.

To me the idea here isn’t that you ask the Fed to do less. And my feeling is that while central banks have their problems, they’ve had a pretty good track record relative to other forms of policymaking for the last 15 years.

But it’d be nice if they got a little help. You can’t run an entire economy via monetary policy.

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