Fed Arms Race to Facebook: Themes That Have Economists Buzzing

Rich Miller and Christopher Condon

(Bloomberg) -- Sign up here to receive the Davos Report, a special daily newsletter that will run from Jan. 20-24.

Hundreds of papers and presentations are made each January at the annual conference of the American Economic Association. This year’s gathering in San Diego was no exception.

From how much do Facebook and WhatsApp really contribute to economic output, to the “communications arms race” between Fed officials for attention in financial markets, there was a lot to absorb.

Here are some that caught our eyes and ears:

Facebook GDP

Would you give up Facebook for one month in exchange for $50? The question, posed by MIT’s Erik Brynjolfsson and four co-authors of a new paper, may help economists get a better measure of the extent to which new, free technologies are reshaping the economy and our lives. The answer, unsurprisingly, is a lot. They estimate that the social network by itself could add as much as 0.11 percentage points annually to U.S. gross domestic product if measured by its benefit to users.

Upbeat Bernanke

Former Federal Reserve Chairman Ben Bernanke delivered what he called “a relatively upbeat” assessment of the U.S. central bank’s ability to fight the next recession in a paper he presented to the AEA. While the Fed has limited room to cut short-term interest rates because they’re already so low, Bernanke argued that quantitative easing and forward guidance could provide enough extra punch to combat a future economic contraction. “The new policy tools are effective,” Bernanke said in a blog post summarizing his address.

Fed Arms Race

University of California Berkeley professor Annette Vissing-Jorgensen took a look at what she called “the communications arms race” among Fed policy makers. She argued in a paper that Fed officials compete for the attention of financial markets because those who succeed in moving the markets’ policy expectations gain the upper hand in policy making. This leads to a cacophony of public appearances but also to a “quiet cacophony” of informal communication between policy makers and market newsletters or the news media, according to Vissing-Jorgensen.

‘Semi-Automatic’ Stabilizers

In a joint paper, former U.S. Treasury Secretary Lawrence Summers and ex-International Monetary Fund chief economist Olivier Blanchard sought to set out precepts for the use of fiscal policy akin to those laid out for interest rates by the famed Taylor rule. In trying to do so, the economists coined a new term -- “semi-automatic” stabilizers -- for tax or spending measures triggered by the crossing of some statistical threshold. They argued that the trigger should be based on changes in unemployment rather than on output movements, which can be more transitory. And to Summers’s surprise, they found that what they call inter-temporal measures -- such as temporary sales tax cuts or investment tax credits, both of which encourage spending to be pulled forward -- were particularly effective, with lesser costs than feared.

Mankiw vs MMT

Harvard professor Gregory Mankiw gave the thumbs down to Modern Monetary Theory. While the theory -- which argues that the U.S. can run bigger budget shortfalls without worrying about going broke -- contains “some kernels of truth,” its most novel policy prescriptions don’t stand up to scrutiny, the former White House chief economist argued in a paper. “I agree that the economy normally operates with excess capacity,” Mankiw wrote. “But that conclusion does not mean that policy makers only rarely need to worry about inflationary pressures.”

Millennials vs Money

A group of economists including Brookings Institution budget expert William Gale found reasons to worry about the saving behavior of millennials. While millennials have some advantages relative to previous generations, such as more education on average, longer working lives, and more flexible work arrangements, they also have disadvantages, including having to take more responsibility for their own retirement plans and typically marrying and bearing children at later ages, according to a paper presented to the conference. The millennial generation also contains a significantly higher percentage of minorities who’ve tended to accumulate less wealth than white Americans in the past. While acknowledging that predicting retirement savings in 2050 is fraught with uncertainty, the authors nevertheless conclude that “there is clearly cause for concern.”

Central Culprits

Central bankers in industrial countries for the most part maintain that they’re not responsible for the current low level of interest rates. They argue instead that structural forces, such as aging populations and slowing productivity growth, are what’s pushing rates down. A team of economists led by Bank for International Settlements’ Claudio Borio took on that view. In a paper, they laid out a case that monetary policy regimes have played a role in long-term movements in interest rates dating back to 1870. In the most recent period, the central bankers’ focus on pushing inflation up to certain targets, in the face of headwinds from globalization and possibly from advances in technology as well, has helped depress rates, they wrote.


After going from owning a tenth of publicly available U.S. Treasury notes and bonds in 1985 to over half in 2008, foreign governments recently have been reducing their holdings. Middlebury College economist Erin Wolcott found that those shifts have had a major impact on the yield curve. The initial increase in demand shifted the entire curve down, with the largest effects on one- to three-year yields. More recently, foreign governments’ offloading of Treasuries has likely put upward pressure on the middle of the curve, she said. “With segments of the yield curve increasingly determined by international financial markets, it may be more difficult for the Federal Reserve to implement its interest rate policy,” according to Wolcott.

To contact the reporters on this story: Rich Miller in San Diego at rmiller28@bloomberg.net;Christopher Condon in San Diego at ccondon4@bloomberg.net

To contact the editors responsible for this story: Margaret Collins at mcollins45@bloomberg.net, Alister Bull, Ros Krasny

For more articles like this, please visit us at bloomberg.com

©2020 Bloomberg L.P.