By Dan Kervick
The Fed did something on Wednesday: it announced a new program of open-ended quantitative easing, and it announced that it likely won’t pull back on the new round of monthly asset purchases once the economy begins to recover more strongly, but will keep the purchases going for some indefinite period of time afterward. After what exactly was left unsaid. The Fed apparently has a target it intends to overshoot, but hasn’t said exactly what the target is. But whatever it is, we have been given forward guidance that the reaching of that unspecified target won’t stop the asset purchases – at least not right away.
This announcement has greatly pleased all of those people who have been calling for the Fed to do something. Critics of Ben Bernanke have been deeply frustrated by the terrible lack of somethings emanating from the Fed. If only something would be done, the economy would grow and jobs would come back. The economy has been suffering from a something deficit! Where is the doing that needs to be done?
Well something has now been done. Hallelujah. And many of Bernanke’s critics appear to have undergone a religious experience as a result. Bernanke has been transfigured in their eyes from diffident nebbish into brave something-doer: an explorer of uncharted monetary territory boldly doing where no Fed has done before. So the doing has been done – and it’s really something, isn’t it?
Yet when one reads accounts of how these asset purchases are supposed to accomplish their aim of generating a stronger recovery, one gets a lot of conflicting theories. It’s almost as though the mere doing of something – anything – is thought to be more important than the actual nature of the something that is done. But there is a common core running through most of these explanatory accounts: expectations. The economic policy globe, it seems, turns upon the axis of our expectations, and the Fed is the master of those expectations.
Here’s how it works in theory: Suppose there is something X the Fed would like to see happen. The Fed is supposed to make X happen by announcing that it intends to make X happen and that it is doing some other thing Y that is aimed at making X happen. The hope is then that a significant number of people think that there is a causal connection between Y and X, and that Y causes X. They thus start to believe, on the basis of the announcement, that Y will in fact make X happen. And as a result of these beliefs, they then start to behave in ways that depend on the expectation that X will happen. And it is their behaving this way that in the end actually makes X happen – if the trick works.
So what is important, the defenders of this approach say, is that people believe quantitative easing will cause a stronger recovery. They will then start to invest in production, hiring and consumption more readily because they are expecting improved conditions. And by doing these things, people will actually generate the desired stronger recovery. It doesn’t really matter what quantitative easing would have accomplished on its own if people didn’t have these beliefs.
If this approach to governing a society seems strongly familiar to you, that’s because it is an ancient one. It is the way some shamans operate.
The shaman, let’s say, wants the people to plant more crops and work harder in the fields to make the crops grow. So the shaman does a fertility dance to petition the fertility goddess for her favors. The people believe the fertility dance will make the crops grow. They get excited, and start planting with more alacrity. They also work extra hard and put in longer hours in the fields because they now believe the fertility goddess is on their side. And the crops grow! The dance worked; the prayers have been answered. The shaman might believe in his own magic; or he might be a manipulative cynic. It doesn’t matter. The desired outcome occurs either way.
Notice that the effectiveness of shamanistic economics, if and when it is effective, does not depend on what X and Y are. They could be almost anything. It could be that X is a reduction in the unemployment rate and Y is a program of Fed asset purchases. Or it could be that X is an increase in iPad sales and Y is an auction of relics from Steve Jobs’s house. All that matters is that apart from whatever actual causal connections exist between X and Y that operate independently of expectations, there are also a lot of popular beliefs about the connection between X and Y that cause people to act with the expectation that Y will cause X.
Shamanistic economics, when it becomes a routine way of life, debases and undermines our democracy. Its continued efficacy depends on the perpetuation of false and superstitious beliefs among the public, which corrupt public understanding and the capacity for rational public deliberation. It also encourages, and even depends to some extent for its operation, on an attitude of deferential awe toward the central bank and its leadership. And it encourages policy makers themselves to adopt an operating stance of aloof and frequently deceitful control of the masses, rather than a posture of open and accountable public service to the citizenry. The shamanistic policy maker is not a public servant; he is a magus.
It seems deplorable that professional economists are willing to participate in this antithesis of democracy, and replace informed democratic self-government with a primitive and archaic form of governance. To be fair, some of the people calling for more quantitative easing have offered defenses of the program that depend on more firmly grounded and resilient causal mechanisms – non-shamanistic mechanisms that do not depend on the fickle vacillations of popular beliefs and delusions. And even some of those calling for quantitative easing based on the shamanistic path aren’t arguing for the employment of shamanistic economics all the time. Instead, they just seem desperate. They would prefer more concrete actions from the US Congress, but believe it is impossible to get Congress to act. It’s hard to blame them in their despair. The current Congress is one of the most incompetent, malevolent and cynical groups we have ever had sitting in Washington. And the President, with his misguided emphasis on long term deficit and debt reduction hasn’t been that much better – although he has called for more spending up front, with the deficit reduction to be put off until later.
But there are other people – for some reason more prominent in the blogosphere than elsewhere – who defend full-bore shamanistic economics as the preferred way of doing the country’s macroeconomic policy business all the time. They believe the Fed should steer, direct or conduct the economy, playing the expectations of the frequently deluded and grossly untutored masses like an instrument, and managing all with its fertility dances and awe-inspiring pyrotechnics. A certain kind of mind seems drawn to the shamanistic approach. They seem to be mostly white; mostly male; mostly young; mostly college educated. They don’t seem to like democracy very much – and the fact that the shamanistic system keeps politicians and citizens out of the picture, and concentrates power in the central bank and the major financial institutions it coordinates and conspires with, is appealing to them.
There is an alternative version of the expectations model of Fed policy that some would say excuses the expectations-oriented macroeconomist from the charge of shamanism. On this view, we are to imagine the world consisting entirely of a thought leader surrounded by people who watch and listen to everything the thought leader does and says, and who form their expectations accordingly. They all know that everyone else is watching and listening to the thought leader, and is also forming their expectations in accordance with the leader’s powerful words. But since they all know these facts about how they and their companions are forming their expectations, then when they do change their expectations of the future in response to the thought leader’s statements, they are behaving rationally. Mass conformity, coupled with mass knowledge of mass conformity, renders the expectation of continued conformity rational. It’s not magical or superstitious at all.
How delightfully clever!
But here is the problem with the applicability of this philosophical thought experiment. In the real world, very few people are really paying much attention to the Fed and its illustrious Chairman, much less forming their expectations in the light of his words. If you work in an ordinary place of business, filled with a broad cross section of folks, try asking a few random co-workers what they thought of Ben Bernanke’s press release or press conference on Wednesday. And for those among them who listened, and can say something non-vague about it, go on to ask them how they are changing their behavior in response.
What the popularity of this cramped expectations conformity model among some economists really shows is that the people who are attracted to it believe that the Fed guides the economy because it guides the actions of the only people who matter – the big players in the asset markets, who hang on the central bank’s every statement, whose moving and shakings shape the world, and whose profits then trickle down on the rest of us. It’s a top-down view of economic reality. These financial and asset market giants are the true masters of the universe. (They are also often the guys the shamanists went to college with.) Macroeconomic policy should be geared toward feeding them with profits and keeping them happy, not toward building an economy from the ground up. Boost big finance, keep the meddling masses out of the decision-making, and let some of the overflow trickle down.
Will quantitative easing work? I’m skeptical. But who can say for sure? Perhaps business people are excited enough by Bernanke’s fertility dance to start planting their economic fields again and begin investing more heavily in work and production. Maybe there are enough suckers believers out there to drive the economy forward with their new zeal over this confusing Fed something. Or maybe we’ll just get a brief asset rally followed by nothing – or even another dangerous and unproductive bubble blown up by short-term profit seekers who will accelerate the QE hype just long enough to make a buck for themselves before cashing out.
But if the expectations magic does work a bit that is in itself worrisome. The continued practice, and occasional success, of shamanistic economics will add to the vanity of the elites who are drawn to this way of thinking about macroeconomic governance. They will argue for even more transfers of economic policy power away from the elected, political branches of government to the central bank. They will be more convinced than ever before that they are in the possession of special magical powers or wisdom, and even more strongly convinced of their divine right to govern. They will redouble their commitment to top-down, plutocratic economic governance. And transitory successes in shamanistic economics will increase the superstitious tendencies and political passivity of others who don’t know any better, and who assume that the elites always know best.
You can follow me on Twitter @DanMKervick.