The Corner

Economy & Business

Kashkari vs. Rules

Neel Kashkari, president of the Minneapolis Fed, argues against a rules-based monetary policy in the Wall Street Journal. His main point is that following the Taylor rule for monetary policy would have led to much higher-than-optimal interest-rate policy from the Fed over the last five years, causing 2.5 million fewer Americans to be employed. I imagine that Stanford University economics professor John Taylor, author of the eponymous rule, will have a response on his blog.

But even if Kashkari is right about the Taylor rule, it does not follow that it would be impossible to devise a different rule that would be likely to yield better results than a Federal Reserve following its own discretion. (“Better results,” of course, need not be perfect results, and it bears remembering that the track record of the discretionary Fed is not especially good.) I’d be interested in seeing the results of a simulation of a sensible rule in which the Fed kept the path of nominal spending predictable.

Such a rule would, I think, be immune to Kashkari’s closing criticism.

We need an economy that is growing strongly on its own, driven by real, productivity-enhancing investments, rather than support of the central bank. Markets are signaling optimism that the new Congress and the incoming Trump administration might enact fiscal and regulatory policies that could drive that type of real economic growth.

If markets are right and that growth materializes, the last thing we will want is monetary policy on autopilot that could quash the recovery because it is unable to recognize if productivity and potential output are rising and the economy has room to run.

Part of the virtue of a nominal-spending rule is that it does not need to recognize an increase in productivity or potential output. If those things rise, sticking to the rule just means lower inflation and higher real economic growth. You don’t lower the target to block the economic expansion, as Kashkari worries. And you don’t raise the target, which would be more in keeping with past Fed practice but just makes monetary policy pro-cyclical.

Ramesh Ponnuru is a senior editor for National Review, a columnist for Bloomberg Opinion, a visiting fellow at the American Enterprise Institute, and a senior fellow at the National Review Institute.