It's the Economy Stupid

Scarsellino - Driving of the Merchants From the Temple

I really hate money.  Or, economics to be more precise.  I hate it on two levels.  First, it's just super complex.  And economists don't seem to agree.  The fact that there are liberal economists and conservative economists really bothers me.  Understanding the most basic economic principles seems fraught with politics.

But then there's the second way in which economics frustrates me: it is relevant to everything I care about.  Aside from being impenetrably complex, it is essential to understanding our social system.  So how can I blog about poverty, race, class, education, human behavior, etc. without really understanding economics?

(Also, on a really deep level - to my shame - I just find the numbers boring.  When I hear words like devaluing, capitalization, marginal rate, gains, futures, leveraged or inflation, a little pit in my stomach squilches.)

So, I was happy to have tuned in to a recent Planet Money podcast in which "The Fed", which generally makes me think of the most boring haunted house you could imagine, was explained in a refreshingly easy-to-understand segment.

OK, so this is super... superficial.  But they were talking about a listener's question as to what was so special about the idea of keeping inflation at 2%?  You got me.  I know lower = better for me, personally.  But as to fiscal (or monetary?  What the hell is the difference!) policy, I have zero idea.

Apparently Bernanke came out in 2012 and announced that a committee at the Fed (I assume made up of super smart people, who know what things like amortization mean), all got together and agreed that 2% was a good basic rate to generally target.  It made sense, after this explanation from Jacob Goldstein...

So low interest rates = cheaper loans for businesses.  Businesses can borrow more, which means they can hire more.  Hiring more is good for employment.

But, once employment peaks, or when most people who want a job can get a job, unemployment is low, and it is a tight labor market.  These means workers gain a wage advantage as businesses must compete for workers, driving up wages.

Good for workers, but now businesses must charge more to pay for higher labor costs.  They then pass this cost along to - where else? - consumers.  Which means now prices are higher.  And when everything is more expensive, your dollar doesn't go as far, is basically worth less.  In other words increased inflation.

So you can see, there is a point at which lowering interest rates becomes a bad thing.  On the other hand, having high interest rates isn't good either, for obvious reasons.  The reverse happens, which ultimately leads to slow business growth and fewer jobs, lower wages, etc.  The trick is finding a balance.

Now, the answer to the original question: why 2%?  is something 20 brilliant PhDs with over a million combined total hours of studying this stuff* will have to answer.

But I enjoyed the simple explanation.  Of course, here's the thing.  This is no doubt a "political" question, as in, there are probably critiques of this formula that the assumptions are incorrect, and different market schemes would lead to different outcomes.  We can add in the sort or moral dimensions of what the hell banking even is, and invoke the sort of reverse-Godwin's Law by bringing in Jesus and the moneylenders and social hierarchy.  End the Fed!  Blah blah blah.

Go read Das Capital.  I fucking dare you.  You won't understand it.  Maybe as an economist you might.  But then you'd be missing the social science elements, which you never quite studied because you weren't taking any of it at a graduate level.

Admit it.  You're barely better than me.  You hear the news reports on the latest dow industrial averages going up and down and don't bat an eye.  Sure, it seems reasonable.  5% up.  2.5% down.  Nasdaq.  NYSE.  S & P.  Aflac.  Bisquick. Of course it is utterly meaningless.  They might as well be reporting on how many feathers washed up at the local duck pond for how relevant it is to 99.9% of the public's economic understanding.

But I digress.  You probably detect a note of bitterness in my tone.  I told you I hate money.  But today I learned something about the Fed.  It was interesting.  Hopefully it was to you too!

*in the spirit of this post I did some rough numbers.  Assuming 30 years of experience, putting in 40 hours a week over 11 months of the year.  Of course, not all 40 hours were spent in books.  But many likely were, and many papers were likely written by putting in more than 40 hours a week.  And I didn't include all the hours actually spent getting the original degrees to begin with.  Bottom line, that's a lot of damn experience.