In a speech in New Jersey last week, Philadelphia Federal Reserve Bank President Charles Plosser sounded an Austrian note in reportedly calling for the Fed to slow or halt its bond purchases in the near future because their benefits are “pretty meager” and they involve “lots of risks” including distorting the economy. Plosser also criticized the Fed’s zero interest-rate policy as counterproductive, stating:
Efforts to drive real rates more negative or promises to keep rates low for a long time may have frustrated households’ efforts to rebuild their balance sheets without stimulating aggregate demand or consumption . . . Monetary policy accommodation that lowers interest rates is unlikely to stimulate firms to hire and invest until a significant amount of the uncertainty has been resolved. Firms have the resources to invest and hire, but they are uncertain as to how to put those resources to their highest valued use.
President Plosser is to be applauded for his Austrian insight that rational entrepreneurial skittishness in the face of regime uncertainty–and not a shortage of money or Krugman’s mythical “liquidity trap”– is responsible for the U.S economy’s stagnant recovery. This insight needs to be taken to heart by those Austrians who argue that the panacea for what ails us is for the Fed to implement a policy targeting nominal GDP. In a recent article, Bloomberg journalist Caroline Baum criicized nominal GDP targeting, pointing out that nominal spending was still rebounding back to its pre-recession level from 2001 to 2003, yet the housing bubble was in full swing with housing prices rising 10.5 percent in 2003 alone.