Advantages & Disadvantages of Monetary Policy

The Federal Reserve Building in Washington DC.
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Monetary policy is conducted by the U. S. Federal Reserve banking system, which has expressed the two basic goals of monetary policy as

• The promotion of the maximum sustainable output and employment, and

• The promotion of stable prices.

The Fed proposes to do this by restricting the money supply when the economy is in danger of overheating, and encouraging economic growth by increasing the money supply when the economy is in danger of contraction.

The Partisan Lens

The idea of doing something that prevents both economic inflation and depression while keeping unemployment low and ensuring a stable economy seems inarguably a good thing. Who could possibly object to a Federal Reserve policy that aims to do that?

It turns out that many economists do object strongly, some to what is viewed as an overweaning federal policy of intrusion in commerce, others to an inadequately forceful implementation of that policy. Both sides of this argument see failure, but from almost symmetrically opposing perspectives. Liberal economists generally view an energetic monetary policy as a good thing and tie it to other liberal objectives. Conservative economists generally view an intrusive monetary policy as a bad thing and align this view with other conservative aims. It turns out to be difficult, perhaps not even possible, for many observers to assess monetary policy without seeing it through a partisan lens.

The Conservative View

Writing a 2014 article entitled "Why the Fed's Monetary Policy Has Been a Failure" for the fiscally and politically conservative Cato Institute, R. David Ranson contrasts the relatively rapid recovery from the 1981-82 recession with the much slower recovery from the 2008-2009 recession. He notes that the earlier recesson, which lasted only 7 quarters, occurred during the Reagan administration when the Fed largely let the recovery run its course. He contrasts this with the 2008-2009 recession, which took 15 quarters to recover. He attributes this to the failure of the Fed's policy of active intervention during Obama's administration.

Ranson's view is the usual view among conservative economists and media. A 2013 Forbes article, "Economically, Could Obama Be America's Worst President?," concludes that the Fed's intrusion only made a bad situation worse, and is responsible for what in 2013 was still a relatively high unemployment rate.

A 2015 Wall Street Journal article, "The Slow-Growth Fed," comes to the same conclusion and admonishes the Fed to "take some responsibility" for their intrusive monetary policy's contribution to an unusually slow recovery. The Economist, a respected journal that mixes free market economics with liberal social policies, similarly dismisses the Fed's expansionist policy with an article entitled, "Why Is the Fed Planning to Fail." Like the others, it goes beyond finding the Fed's policy ineffective to determining that the policy itself assures the failed economic outcome.

The Liberal View

If you had read only conservative economists' objections to what they see as excessive Fed manipulation of the money supply following the 2008-9 recession, you might suppose that liberal economists would generally write in its defense. That turns out not to be case. The New York Times' Nobel Prize winning economist, Paul Krugman, wrote three separate articles on monetary policy from January through May of 2015. Each of them detailed the Fed's failure to actively grasp the monetary policy situation and take sufficiently decisive action and held a timid Fed monetary policy directly responsible for the slow recovery.

A sophisticated expression of disenchantment with Fed policy by liberal economists is given by Christina and David Romer, influential University of California at Berkeley economists who have also held influential positions as economists in government. In a data-rich article assessing Fed policy over several administrations, "The Most Dangerous Idea in Federal Reserve History: Monetary Policy Doesn't Matter," they argue that the Fed's real monetary policy failures have generally been the result of timidity and an inability to create monetary policies sufficiently energetic to be effective.