Why Not Monetary Policy

I wonder if we (liberals) made a bad decision not to focus more on monetary policy solutions to our unemployment problems. I have taken a lot of my cues from Paul Krugman, and while he acknowledged that there were things the fed could do, he seemed to calling more strongly for fiscal stimulus.

There was a speech by the head of the Chicago Federal Reserve calling for greater fed action. His logic is simple and clear: the fed has a dual mandate - to maintain optimal levels of inflation and unemployment. We can say that the optimal levels are probably 2 percent for inflation and 6 percent for unemployment (a conservative estimate for full employment).

With unemployment 3 points higher than optimal, the fed should be doing way more. In fact, it should be willing to accept 3 percent inflation if it means bringing unemployment down to say 7 percent. And the Fed signaling their willingness to tolerate higher inflation is one of the non-standard tools Krugman said was possible to help bring down unemployment.

I - and many liberal economics commentators - love the speech. But I really think we should have been pushing for this much harder already. Fiscal stimulus was a non-starter. Obama couldn't achieve it. I believe he should have called for it and made Republicans look bad. But he couldn't get it. But he could have gotten more action from the Fed.

And he could have turned it into a great argument with Republicans. Imagine them fighting against monetary policy - so extreme they oppose Milton Freedman. And we could have had a debate about which is more important, inflation or unemployment? Republicans favor bankers, Democrats favor the unemployed.

In this case, all he had to do was convince the Fed that he was right - not ideologically extreme Republicans. And I think he could have won the debate as well.

But it's not too late (though Obama didn't mention it in his jobs speech). We need to push this front. Obama's jobs initiatives will be helpful (depending on how much is passed). But this could do a lot and sooner. And with less budget implications.