The Cycle of Rules and Discretion in Economic Policy > Publications > National Affairs. FROM ISSUE NUMBER 7 ~ SPRING 2. GO TO TABLE OF CONTENTSJOHN B. TAYLOROn December 2. Winthrop Aldrich — who was then serving as president of the nation's largest bank, Chase National — addressed the first joint luncheon of the American Economic Association and the American Finance Association. The two groups — and, with them, the larger community of American economists — were struggling to find a way out of the seemingly endless economic state of emergency America had experienced in the prior two decades, and to shape a post- war approach to macroeconomic policy. Deriving the Prediction Rule. We derived a prediction rule for prognosis by analyzing data on 14,199 adult inpatients with community-acquired pneumonia in the 1989 MedisGroups Comparative Hospital Database, which contains. Charles II was born in St James's Palace on. His parents were Charles I (who ruled the three kingdoms of England, Scotland and Ireland) and Henrietta Maria (the sister of the French king Louis XIII). Five-Year Follow-up of Patients Receiving Imatinib for Chronic Myeloid Leukemia. O'Brien, M.D., Ph.D., Insa Gathmann, M.Sc., Hagop Kantarjian, M.D. Welcome to the Louisiana House of Representatives Web site. The goal of our site is to provide easy access to state government, particularly, the House of Representatives. Through this site, you can follow House activities. In his remarks, Aldrich took up a theme that would reverberate throughout the post- war era: the question of whether monetary policy should be guided by the goal of long- term price stability or yield to short- term pressures to keep interest rates low. Aldrich blamed the Federal Reserve's easy- money policies of the 1. Great Depression. In the late '4. 0s, he was concerned that the Fed would monetize the enormous World War II debt, printing money to buy up Treasury bonds and thereby increasing the risk of inflation. Douglas's themes were similar to Aldrich's, though he focused on fiscal policy. He knew the Keynesian arguments for short- term deficit spending but was concerned about the national debt: . We shall need a proper sense of values and a high degree of ethical self- restraint if we are to reach our goal. That dispute has often centered on the merits of rules- based policymaking versus those of discretionary policymaking. Of course, fiscal and monetary policies always involve some combination of rules and discretion: Policymakers never simply employ one approach or another by itself. But they do, at different times and in response to different pressures, tend to emphasize one over the other. When policymakers lean in the direction of rules, they pursue less interventionist, more predictable, and more systematic policies. In monetary policy, the Federal Reserve adheres to a steady and predictable strategy for adjusting interest rates or the money supply. In fiscal policy, legislators and executive- branch officials set long- term debt, spending, and revenue policies and rely on . In monetary policy, the Federal Reserve seeks to influence or respond to momentary fluctuations in unemployment and inflation without a long- term strategy. Fiscal policy comes to involve targeted and temporary spending and tax changes, the goals of which are usually to produce a short- term stimulus. Economic policy during the post- war period has consisted of three major oscillations between rules- based and discretionary policy. The first swing moved toward more discretionary policies in the 1. In the past decade, there has been a return to discretion. Remarkably, the same oscillations occurred simultaneously in both monetary and fiscal policy. Each of these swings has had enormous consequences for the American economy. Taken together, they make for a historical proving ground in which to study the effects of rules- based and discretionary policies on the economy. So what, then, might we learn from this evidence about the effects of these policies on unemployment, inflation, economic stability, the frequency and depths of recessions, the length and strength of recoveries, and periods of economic growth? What does history suggest about the question that concerned Aldrich and Douglas, and that has consumed countless economic thinkers since? When it comes to fostering prosperity, which is better — sticking to clear rules, or granting policymakers broad discretion? THREE SWINGSIn the decades following World War II, Keynesian ideas about countercyclical fiscal policy became increasingly popular among academic economists. This developing consensus received an official imprimatur when the 1. Economic Report of the President — the annual publication produced by the President's Council of Economic Advisers — made an explicit case for significant discretion in economic policy. According to the council, a similar logic must prevail in monetary policy — where . Supreme court of appeals in the supreme court of appeals of west virginia. The Cycle of Rules and Discretion in Economic Policy. O n December 28, 1948, the famed financier Winthrop Aldrich — who was then serving as president of the nation's largest bank, Chase National. By and large, they took the form of stimulus packages and other targeted spending or temporary tax changes intended to drive demand or otherwise manipulate the economy. They included the investment tax credit of 1. As late as 1. 97. Carter administration successfully enacted discretionary stimulus packages, including sizable grants to the states for infrastructure. The epitome of interventionist economic policy, though, was the imposition of wage and price controls by the Nixon administration in 1. The original 9. 0- day freeze on nearly all wage and price increases expanded into a three- year experiment in discretionary inflation control — an experiment that ultimately failed. Indeed, in 1. 97. Federal Reserve chairman Arthur Burns defended the administration's efforts; the reason, he explained to another joint luncheon of the American Economic Association and the American Finance Association, was that . No one, it seems, was heeding Milton Friedman's counsel — offered in his own American Economic Association address in 1. Federal Reserve should go about . Those responses can be divided into several distinct boom- bust periods, each of which saw the Fed ease and then sharply tighten the money supply. These measures induced contractions in economic activity, but the Fed then failed to sustain its tighter policy long enough to yield a lasting decline in inflation. Again and again, short- term thinking led to uneven and irregular monetary decisions. This dynamic began to change as the 1. Some prominent analyses of the effects of discretionary fiscal stimulus — perhaps most notably that of economist Edward Gramlich in his 1. Carter stimulus packages — undermined the support for such policies among academic economists. On the practical side, the Reagan administration eschewed highly discretionary approaches in favor of greater reliance on fundamental (and permanent, rather than temporary) tax reforms. This reliance on automatic stabilizers (rather than discretionary policies) in responding to the ups and downs of the business cycle continued through the 1. A very small stimulus was proposed by President Bush in 1. Congress. Another small stimulus was proposed by President Clinton in 1. By 1. 99. 7, Northwestern University economist Martin Eichenbaum could write of the . This marked a dramatic change from most of the 1. Fed repeatedly switched emphasis from unemployment to inflation and back again. In his 1. 98. 3 address before that year's AEA- AFA luncheon, Volcker noted that the Fed had . In the 1. 97. 0s, decisions about interest rates were hidden within the Fed's announcements about its borrowed reserves. By the early 1. 99. Fed was announcing its interest- rate decisions immediately after making them, and was even publicly explaining its expectations and intentions for the future. The transcripts of meetings of the Federal Open Market Committee — the Federal Reserve body that makes decisions about interest rates and the money supply — throughout the 1. The empirical evidence, too, plainly demonstrates that monetary policy corresponded far more closely to simple policy rules in the 1. John Judd and Bharat Trehan of the Federal Reserve Bank of San Francisco. But this commitment to rules- based economic policy has waned in the last decade. Perhaps an early sign of the change was the Bush administration's decision to respond to the economic downturn it confronted in 2. Though one could say this was a down payment on the more permanent 2. Milton Friedman to pronounce with regret that . Between 2. 00. 3 and 2. Federal Reserve held interest rates far below the levels that would have been suggested by the monetary- policy rules that had guided its actions in the previous two decades. The deviation was large — on the order of magnitude seen in the unstable decade of the 1. The Fed's public statements during that time — which asserted that interest rates would be low for a . The Bush administration then responded to the downturn that began in December 2. First came a $1. 52 billion stimulus package enacted in February 2. The following month began a series of on- again- off- again bailouts of the creditors of financial firms — on for the creditors of Bear Stearns, off for those of Lehman Brothers, on for those of AIG, and then off again while the Troubled Asset Relief Program was rolled out. During the ensuing panic in the fall of 2. The next year, the Obama administration advanced an $8. Cash for Clunkers program. The Fed then stepped in with more discretionary policy of its own, most notably its massive quantitative- easing policy in 2. Treasury bonds). The Fed's second round of quantitative easing — which is popularly known as . All told, there can be little doubt that the rules- based economic policies of the 1. DISCRETION, RULES, AND CONSEQUENCESWhat effect did this policy cycle have on the economy? What happened to America's economic performance — measured through employment, inflation, stability, the nature of recessions and recoveries, and economic growth — as the pendulum swung back and forth between policies governed by rules and those based on discretion? The three periods in question clearly coincided with dramatically different levels of economic performance. The first swing, toward discretionary policies, aligned with a period of frequent recessions, high unemployment, and high inflation from the late 1. In fact, inflation, unemployment, and interest rates all reached into double digits in this period, and by the late 1. America that our economy was out of control, and perhaps headed for an enduring decline. The second swing, toward more rules- based policies, coincided with a remarkably stable period, frequently called the Great Moderation, from the mid- 1. Both the levels and the volatility of inflation and interest rates were markedly lower than they had been in the 1.
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