Two Stories

From The Atlantic of 27 April, The 2% Catastrophe: How One Number Explains the Miserable Economy, by Matthew O'Brien.

I don't like it. Part of the problem is attitude, the careless way O'Brien presents his ideas about fixing the economy. "The Federal Reserve is crucifying the U.S. economy on a cross of two-percent inflation," he writes. "The Fed has fetishized two-percent inflation," he writes. "Who's afraid of 3%?"

But the bigger problem is that his economic analysis is flawed:

If the economy is running too hot, the Fed raises interest rates. If it's running cold, it lowers rates.

For 30 years, this worked spectacularly. Recessions were rare and shallow. Inflation was low. Then 2008 happened. Even zero interest rates weren't enough to revive the collapsing economy.

"For 30 years, this worked spectacularly... Then 2008 happened." Yeah, but 2008 was where the economy was heading for 30 years. Matthew O'Brien overlooks that.

And those years were not spectacular. They were moderate. We had moderate growth, moderate inflation, moderate recessions, and moderate, jobless recoveries. And then those thirty years ended. Spectacularly.

It doesn't seem to matter to Mr. O'Brien why things were no better than moderate for so long. Nor does it seem to matter to him why the ending was spectacular. He doesn't even appear to see the connection between the long-moderating economy and its ultimate shutdown.

"If the economy is running too hot, the Fed raises interest rates. If it's running cold, it lowers rates," he says. But in the end, "Even zero interest rates weren't enough to revive the collapsing economy."

O'Brien's analysis is wrong. He leads us to imagine that the Fed pushed interest rates up and down in some kind of random walk, then dropped them all the way to zero in 2008. This is totally inaccurate. Interest rates trended down for thirty years. The walk was not random, despite the ups and downs. It was all downhill. Since 1981, it was all downhill.

Graph #1: The Federal Funds Rate

Since 1981 interest rates moderated, just like inflation, growth, wages, and everything else. Interest rates worked their way down as low as they could go. When they couldn't go any lower, they were no longer useful for boosting an economy that was "running cold". That made the economy unfixable, since interest rates are all we seem to know.

Not really the same story Matthew O'Brien tells, is it.