Saturday, November 20, 2010

Tim Geithner's "Laffer Gaffe"

Art Laffer was widely, and largely correctly, mocked for warning what would happen if Medicare and Medicaid were done by the government. Of course, Medicare and Medicaid already are, and have always been, government programs so this was a quite, shall we say laffeable (or laughable to use the normal spelling) argument. But now we see Obama's Treasury secretary Timothy Geithner make an equally laughable argument. Commenting on the proposal from some Republicans that the Fed should no longer have "full employment" as part of its mandate, Geithner said "It is very important to keep politics out of monetary policy". But politics is already involved in monetary policy, even accepting for the sake of the argument the flawed premise that unlimited discretionary power for Fed officials would be "non-political". The mandate of the Fed to pursue "price stability and full employment", was the result of a polirtical decision in 1978 known as the "Full Employment and Balanced Growth Act". Changing this is no more political than keeping it.