Tuesday, October 18, 2011

What is Wrong with This Statement?

According to the AP, Dallas Fed President Richard Fisher believes that the Fed's policies are making it easier for Congress to avoid hard choices:
"The more we offer accommodative monetary policy," said Fisher, president of the Federal Reserve Bank of Dallas, "the less incentive they have to pull their socks up and do what's right for the American people."
What is wrong with this statement?  The answer is that Richard Fisher has the causality backward.  The very reason Congress has been running deficits in the first place that need to be addressed is because the Fed failed to first prevent and then afterwards correct the collapse in nominal spending that took place in 2008-2009.  This failure to return nominal spending to its trend path increased the cyclical budget deficit and opened the door for the structural budget deficit brought about by President Obama's fiscal stimulus.  

If Fisher really wants to create an economic environment conducive to fiscal consolidation, then the Fed must first restore robust nominal spending.  Most studies show that successful fiscal retrenchment requires an accomodating monetary policy that stabilizes nominal spending.  If the Fed were to tighten, as Fisher currently desires, then Congress will be facing an even bigger budget deficit to reign in. There is no way around this reality.


  1. Richard Fisher is an active menace to American prosperity.

    I never, ever endorse any form of censorship, but when it comes to ultra-vulgar rap music, or Richard Fisher, I waver.

  2. I think you have Fisher backwards. He's saying that the Fed has tools at its disposal (accommodative monetary policy) that could be used to improve the economy and reduce budget deficits. But if those tools are utilized, it takes a tremendous amount of pressure off Congress to utilize other tools (such as deep and long-lasting budget cuts) that have additional benefits that Fisher thinks are "right for the American people".

    Konczal was right to mention Chernyshevsky.