Here’s something I’ve been pondering on-and-off for about two years now, but frankly know little about. I'm an amateur, and just found 3 hours to write up my speculations. Would love to get your vigorous input and corrections, particularly on economic considerations where you have some expertise as an academic or practician.
→ Update: see brief response by Open Philanthropy's staff.
- OpenPhil argues:
"monetary policymakers currently face political pressure to over-emphasize risks of inflation, relative to the suffering and lost output caused by unemployment." - Holden Karnofsky elaborates more on it here:
- "We've come to the view that there's an institutional bias in a particular direction. We believe that there is more inflation aversion than is consistent with a "most good for everyone" attitude. We think some of that bias reflects the politics and pressures around the Federal Reserve. We've been interested in macroeconomic stabilization for a while. There's this not very well-known institution, which is not very well understood and makes esoteric decisions. It's not a big political issue, but it may have a bigger impact on the world economy and on the working class than basically anything else the government is doing. Maybe even bigger than anything else that anyone is doing.
- ...
- I think it's kind of a twofer. We haven't tried to do the calculations on both axes, but certainly, it seems like it could provide broad-based growth and lower unemployment. There are a lot of reasons to think thoseat might lead to better societal outcomes. Outcomes such as better broad-based values, which are then reflected in the kinds of policies we enact and the kinds of people we elect.
- I also think that if the economy is growing, and especially if that growth is benefiting everyone across the economy: if labor markets are tighter, and if workers have better bargaining power, better lives, better prospects in the future, then global catastrophic risk might decrease in some way. I haven't totally decided, how does the magnitude of that compare to everything else? But I think if we had the opportunity to go bigger on that cause, we would be thinking harder about it."
- And Alexander Berger here:
- "We’ve also done a bunch of work on U.S. policy causes, including ... macroeconomic stabilization. We’re not currently planning to grow that work as much because we think we probably can find some better opportunities in the future. ...
- So we’re not totally sure about the future of that program. We’re not actively winding it down, but we haven’t been doing a lot more. We have been thinking about pivoting a little bit more to work in Europe, where if you just compare the E.U. policy response to the Great Recession to the American one, I think there’s a huge gap. And also frankly, the recoveries to the Great Recession — as much as I complained about the U.S. policy response, the degree of self-inflicted wounds by European monetary policymakers is I think genuinely somewhat astonishing.
- Obviously there are concerns. We’re an American funder. We don’t know as much about policy in Europe as we do about the U.S., and so there’s risks there, and we try to be cognizant of those. But I think we might continue to do a little bit more in that space and focus more on Europe. Or at some point we might say like… I don’t know if it would be literally declaring victory, but we might say like, we’re not sure there’s a ton more that we need to do here. The case doesn’t look as good as it did before. Why don’t we just step back?
- Rob Wiblin: I guess in the U.S. they’re slightly worried that possibly the pendulum has swung too far in the other direction. People always respond to the last thing that went wrong, and now we’ve over-learned the lesson from 2008. But in the E.U., it doesn’t seem like people have learned the lesson from 2008 all that much. It seems like the E.U. would basically go and do exactly the same thing again. Which is strange."
- My paraphrase:
- The case OpenPhil makes is that modern macroeconomic theory supports injecting more money into the financial system to increase overall economic growth. Further, it would lower unemployment amongst and increase the bargaining power of people with lower incomes, in turn raising their material well-being and future prospects (and potentially reduce risk factors that magnify the chance of a global catastrophe occurring – say, through reducing civil unrest). But that the US Federal Reserve and European Central Bank face political pressures biasing their decisions towards a more conservative or 'hawkish' monetary stance - from influence exerted by rich people who don't want to see their savings dwindle under rising inflation.
- So as an exercise on paper, I think those are reasonable and coherent arguments.
- In some way, influencing central banks (by e.g. funding the 2016 Fed Up Campaign) is a higher leverage intervention for increasing financial support to financially poor people than funding microexperiments on distributing basic incomes.
- When I first read OpenPhil's case around two years ago, however, I noticed having an averse feeling towards it. There were some explicit reasons and historical context in the back of my mind that gave rise to that aversion, so let me expand on those below:
1. Risk of macroeconomic model error when going out of the historical distribution
- For some years, I had been digging into the videos and transcripts Charlie Munger, an admittedly rich investor (i.e. someone who could be motivated to rationalise a hawkish stance) who is admired for his sharp and clear reasoning (see e.g. the psychology of human misjudgement). Charlie has a conservative outlook on investing and on life in general, captured by a quote he sometimes shares: 'All I want to know is where I'm going to die, so I'll never go there.'
- The basic argument Charlie makes against the Federal Reserve 'printing' lots of money is that he doesn't know what the effects will be. Here's a 2013 transcript:
- AUDIENCE MEMBER: With the Fed buying 85 billion per month of mortgage securities and Treasurys, what do you think are the long-run risks to this process, and how does the Fed stop this without negative implications? Thank you.
... - CHARLIE MUNGER: My basic answer is I don’t know.
... - CHARLIE MUNGER: I think you’re— the questioner — is right to suspect that it’s going to be difficult.
... - WARREN BUFFETT: It’s going to be — yeah, it is really uncharted territory...
- CHARLIE MUNGER: Well, generally speaking, I think that what’s happened in the realm of macroeconomics has surprised all the people who thought they knew the answers, namely the economists.
- Who would have guessed that interest rates could go so low and stay so low for so long? Or that Japan, a mighty, powerful nation, could have 20 years of stasis after using all the tricks in the economist’s bag?
- So I think given this history, the economists ought to be a little more cautious in believing they know exactly how to stay out of trouble when they print money in massive amounts.
- WARREN BUFFETT: It is a huge experiment.
- CHARLIE MUNGER: Yeah. (Applause)
- WARREN BUFFETT: What do you think the probabilities are that within ten years you see inflation at a rate of 5 percent or higher a year?
- CHARLIE MUNGER: Well, I worry about even more than inflation.
- If we could get through the next century with the same results we had in the last century, which involved a lot of inflation over that long period, I think we’d all be quite satisfied.
- I suspect it’s going to be harder, not easier, in this next century. And it wouldn’t surprise me — I’m not going to be here to see it — but I would predict that we may have more trouble than we think — than we now think.
- To paraphrase Charlie, we don’t know where historically unusual monetary stimulus is going to lead and it could put the entire system at risk
- The Federal Reserve has already done historically unprecedented monetary stimulus interventions over the last 25 years - cumulating into pulling the interest rate at which banks lend each other money close to zero and after that going through 3+ rounds of trillions of dollars of 'quantitative easings' (buying up financial assets in the market). In the lead up to that, stimulus directed under Alan Greenspan as Fed chair enabled companies – fuelled by more freely available debt at lower interest rates – to invest money into new enterprises and consumer loans with poor return prospects, and therefore likely exacerbated the eventual dotcom meltdown in 2000 and great financial crisis in 2008.
- I haven't dug into cases myself, but apparently modern monetary theory has shown some success. Holden Karnofsky himself seems to be a big proponent, having done some analytical work using macroeconomic models earlier in his career. There's a common tendency though amongst macroeconomists (well-recognised by microeconomists) to take elegant and internally coherent models as actually representing a vastly more complex and dynamically changing system composed of interactions between living creatures. Particularly when moving 'out of the historical distribution' like this, I think there is a risk of model error here. And since increasing monetary stimulus based on scenarios predicted using macroeconomic models amounts to running an experiment on the entire system, model error here could put the entire system at risk.
- I'm sure btw that OpenPhil analysts have thought about systemic risk here, but I haven't seen any arguments written out on this - in the case of Karnofsky, mostly optimistic cases for why influencing monetary policy makes sense. This makes me worry that they haven't taken up an appropriately cautious ('precautionary principle') mindset in their analysis.
2. Historically, the Federal Reserve has failed to subsequently tighten monetary stimulus
- I think a Keynesian idea that lies at the heart of Federal Reserve philosophy is that during economic recessions you offer monetary stimulus to support virtuous (re-)investment cycles, and during boom years you tighten market access to funds to prevent debt-fuelled excesses. Based on my shallow reads though, it seems the Fed has a track record of repeatedly doing the former and then failing to follow through on the latter. Repeating rounds of stimulus starting from 1987 became referred to as the Greenspan put (link to a clearly disparaging Wikipedia article).
- The last round of serious monetary tightening I know of was in 1979, when the Federal Reserve board led by Paul Volcker raised the federal funds rate to 20% to curb excess inflation (link to another Wiki article - take this as a sign that I didn't do any serious literature review before writing this up).
- A concern here is that as a Federal Reserve chair, you face a strong short-term incentive to not allow the economy to dip because of any monetary tightening you implement, since doing so means having to face intense criticism and scrutiny from politicians and from constituencies they represent. My vague guess is that over the long run such an incentive will bias the amount of stimulus the Fed provides more than rich people well-connected in Washington lobbying for curbing inflation.
- The recent US inflation hike to 6.8% is an empirical case in point (and is what finally prompted me to write a post).
- Question: How high will the Fed board allow inflation to go from here before imposing tightening measures?
- My worry is that OpenPhil staff might not have seriously considered that by influencing central banks to increase monetary stimulus (on top of what is already a historically unusual amount relative to the size of the targeted economy) they are locking in those central banks into tightening said stimulus less (in terms of the absolute amount the stimulus is tightened to) once debt-fuelled investment bubbles start appearing.
- A meta-worry I have here is that OpenPhil policy analysts may tend to not consider in their effectiveness estimates enough how the existing web of incentives and processes around government institutions will determine the longer-term implementations of their funding programs (when e.g. OpenPhil makes grants to non-profit lobby groups to leverage policymakers' ability to reallocate government funding).
- As a basic analogy, influencing the Fed to increase their monetary stimulus to help poor people is a bit like influencing more money to be spend on healthcare provisions to poor people through the Affordable Care Act (which runs against issues of intransparent pricing of medical services, lack of corrective market mechanisms, and having to build on legacy structures like healthcare insurance being provided by one's current employer – I don't know much about 'ObamaAct' either so feel free to correct me there as well).
- The overall premise seems right - governments can reallocate (in this case ‘newly credited’) funding to improving the welfare of people with lower incomes - but the means through which this gets enacted really matter.
You're mostly right. But I have some important caveats.
The Fed acted for several decades as if it was subject to political pressure to reduce inflation. Economists mostly agree that the optimal inflation rate is around 2%. Yet from 2008 to about 2019 the Fed acted as if that were an upper bound, not a target.
But that doesn't mean that we always need more political pressure for inflation. In the 1960s and 1970s, there was a fair amount of political pressure to increase monetary stimulus by whatever it took to reduce unemployment. That worked well when inflation was creeping up around 2 or 3%, but as it got higher it reduced economic stability without doing much for unemployment. So I don't want EAs to support unconditional increases in inflation. To the extent that we can do something valuable, it should be to focus more attention on achieving a goal such as 2% inflation or 4% NGDP growth.
I don't see signs that the pressure to keep inflation below 2% came from the rich. Rich people and companies mostly know how to do well in an inflationary environment. The pressure seems to be coming from fairly average voters who are focused on the prices of gas and meat, and from people who live on fixed pensions.
Economic theory doesn't lend much support to the idea that it's risky to have unusually large increases in the money supply. Most of the concern seems to come from people who assume the velocity of money is pretty stable. That assumption has often worked okay, but has been pretty far off in 2008 and 2020.
It's not clear why there would be much risk, as long as the Fed adjusts the money supply to maintain an inflation or NGDP target. You're correct to worry that the inflation of 2021 provides some reasons for concern about whether the Fed will do that. My impression is that the main problem was that the Fed committed in 2020 to a particular path of interest rates over the next few years, when its commitments ought to be focused on a target such as inflation or NGDP. This is an area where economists still have some important disagreements.
It's pretty clear that both unusually high and unusually low inflation cause important damage. Yet too many people worry about only one of these risks.
For more on this subject, read Sumner's book The Money Illusion (which I reviewed here).
These caveats are helpful, thank you. I appreciate the elaboration on changing plans for interest rates and inflation by the Fed board and changing influences by non-high income employees and people with pension plans.
I was wondering about whether I had misinterpreted OpenPhil staff’s opinion being that rich people have been indirectly influencing the Fed towards a more hawkish stance (I recalled hearing something like this in another interview with Holden, but haven’t been able to find that interview back). Either way, OpenPhil’s analysis around this is probably much more ‘clustery’ and nuanced. I would agree with you though that high net-worth individuals who have most of their capital put into ownership stakes of companies that hold relatively little cash or bonds on their balance sheets and can flexibly hike up pricing of their products/services won’t be impacted much by rising inflation.
Edit:
Good nuance re: not assuming a constant velocity of money (how fast money passes hands from transaction to transaction). What you wrote doesn’t seem to refute the argument I made concerning model error in current macroeconomic theories.
As again a complete amateur, I don’t have any comment on what range of inflation to target or what the trade-offs are, except that all else equal a 2% inflation rate seems pretty benign.
Overall, your points makes me more uncertain about my understanding of what current stakeholder groups particularly can and tend to influence Fed monetary policy decisions, and how they are motivated to act. Will read your review.
Yes, at least what I wrote was too simplistic. Just found a claim on advocacy they made in their 2014 write-up:
Ah, and I assume NGDP means ‘nominal gross domestic product’. Why should the Fed use nominal GDP instead of real (inflation-adjusted) GDP as a measure for setting targets?
Very complicated question that I’m not at all qualified to speak on, but if you’re interested google Scott Sumner NGDP Targeting. Basically, rather than the current “dual mandate” of maintaining both low unemployment and a little inflation, targeting a fixed rate of NGDP growth would balance the mandate between unemployment and inflation. The idea became very popular in the blogosphere and in real economics literature in the aftermath of the 2008 crisis, where many believe the Fed was too slow to drop interest rates and should’ve been more concern about unemployment than inflation.
Thanks, this is clarifying