In my last post, I discussed the experience of "postal savings" in America—its origins and how its flawed legislative design caused harm during the Great Depression. I showed that some features of the postal savings system adopted for political expediency, such as its fixed interest rates and the requirement to re-deposit the bulk of funds with local banks (but not savings and loan institutions), may have encouraged Depression-era bank runs and delayed the housing market's recovery.
Today I'll discuss the end of the old postal savings system half a century ago, and the idea's surprising recent rehabilitation, this time as an ostensible solution to America's unusually high rate of "unbanked" households. After critically assessing three widely held beliefs underlying the argument that postal banking can help the unbanked, I conclude that it is in fact unlikely to prove effective at achieving that goal.Read the rest of this post »
In assessing the New Deal's contribution to economic recovery, I've naturally tended to draw on fairly recent research. That keeps me from being accused of being out of date. But it makes me vulnerable to the charge of overlooking the testimony of experts who studied the New Deal's consequences at first hand.
To that charge, I plead an emphatic Not Guilty! Those who know me will back me up when I say that I'm actually an antiquarian at heart, who'd much rather read a musty old report than any recent journal article. So I've read plenty of contemporary writings on the course of the depression and recovery, and the New Deal's contribution to them, including those of several of FDR's own advisors. These works often support the critical assessment of subsequent economic historians. If anyone is guilty of exaggerating the New Deal's contribution to the recovery, it's those popular historians who gloss over its failures while declaring that anyone who points to them must be a Hoover Republican!*
Of those failures, none was more glaring than that of the National Recovery Administration, the subject of my previous post in this series. And that failure was no less evident to those who witnessed its consequences as it has been to most economic historians since. I might cite numerous contemporary works to make the point—no other product of New Deal legislation met with more caustic or widespread criticism. But none makes it more assiduously than the 1935 Brookings Institution publication, The National Recovery Administration: An Analysis and Appraisal.Read the rest of this post »
On September 17th, Senators Kirsten Gillibrand (D-NY) and Bernie Sanders (D-VT) went on Facebook Live to announce their introduction of the Postal Banking Act, a bill that would have the US Postal Service provide a "public option" in some retail banking services. Postal banking has been proposed many times in recent years as a progressive reform. The Joe Biden–Bernie Sanders "Unity Task Force Recommendations" document (p. 74) endorsed the idea in August as a way of "ensuring equitable access to banking and financial services." Senator Gillibrand introduced a similar bill two years ago, and an organization called The Campaign for Postal Banking has been promoting the idea since 2014.Read the rest of this post »
The unanimous decision of the Federal Open Market Committee (FOMC) to shift from inflation targeting to average inflation targeting is another step away from its mandate to achieve long‐run price stability. Section 2A of the Federal Reserve Act does not say the Fed’s long‐run objective should be 2 percent inflation. It calls for maintaining the growth of money and credit to “promote effectively the goals of maximum employment, stable prices, and moderate long‐term interest rates.” The legal basis for price stability has not changed, but the Fed’s interpretation of that responsibility has drifted, so that “price stability” now means an increase in the price level (P) that averages 2 percent over time, with the proviso that the average inflation target (AIT) must be “flexible.”Read the rest of this post »
It occurs to me that recent discussions of the Fed's new average inflation targeting plan gloss over a subtle distinction between two different kinds of Average Inflation Targeting (AIT). Hence this post explaining the difference, and why I think it matters.
The difference between the two sorts of AIT that I have in mind is subtle, so pay close attention! It hinges not on any different central bank objectives or reaction function parameters or that sort of thing, but on two different reasons why a central bank might find that it has veered from its inflation target in the first place. A central bank may fail to hit its target because the authorities fail to correctly anticipate upcoming changes in various price level determinants. Call such misses "unexpected target deviations." Or it may fail because, although its forecasts are correct, circumstances prevent it from adjusting its stance as needed, given its forecast, to keep the price level on target. Call these "expected target deviations." The "zero lower bound" (ZLB) problem is the most conspicuous example of a circumstance that could lead to expected target deviations. Allowing that unconventional policies are either impractical or inadequate, a central bank stuck at the ZLB may know perfectly well that it's about to undershoot its inflation target, without being able to avoid doing so.Read the rest of this post »
This essay, the first of a series on government efforts to bank the "unbanked," reviews the history of postal banking and its deleterious role in the Great Depression. Subsequent posts will discuss contemporary proposals for government involvement in retail banking, such as through the U.S. Postal Service and the Federal Reserve, in light of this experience.
Some 8.4 million U.S. households (6.5 percent of the total) have no bank account. For a modern economy, that's a high number. Some experts and politicians believe that the best way to lower it would be to get the U.S. Postal Service to offer bank accounts, with many claiming that America's experience of postal savings between 1911 and 1966 shows how a similar system could help bank today's "unbanked."
Superficial evidence might seem to corroborate their case. Immigrants and minorities make up a disproportionate share of the unbanked, and a recent study found immigrants were particularly heavy users of postal savings in its early years. But most contemporary accounts, especially those that claim postal savings as a model for the present, fail to give due consideration to how a poor legislative design made it a force for ill in the toughest years of the Great Depression. Far from strengthening the argument for post-office banking today, the postal savings experience is a cautionary tale against government participation in activities that have historically been the remit of commercial banks.Read the rest of this post »
Relax: the Fed isn't about to catch fire or melt. This isn't about that sort of warming. It's about a different, more benign sort of Fed warming that my pals at the Mercatus Center claim to have discerned. Still, I don't believe them. Call me a Fed warming skeptic if you like, but so far as I'm concerned, it's all fake news.
Since Jay Powell announced the Fed's new average inflation targeting (AIT) strategy last week, both Scott Sumner and David Beckworth have welcomed it as a step, albeit only a tenuous one, toward their own (and my) preferred policy of NGDP level targeting. Scott calls "average inflation targeting…a tiny step forward," though one that will allow the Fed more discretion than a move to price-level targeting would. David likewise observes that, although it isn't quite an NGDP level target, AIT "is a step in that direction."Read the rest of this post »