Bryan Caplan asked an important question to economics bloggers via the Kauffman survey: “Taking into account its entire history, do you think the Federal Reserve has done more harm than good?”
The returns were surprisingly ambivalent: 56% of respondents answered that the Fed’s influence was mixed (40%) or harmful (18%). Caplan interpreted this as an important result, which should swing us against the Fed if we’ve any presumption against government intervention.
But does this survey really tell us much? The meaning of the question is extremely unclear. The relevant question isn’t whether the Fed has, on balance, done good or bad, but how beneficial it’s been relative to reasonable alternatives. And what those are is not revealed in the question. For example, has the Fed been better than a totally free market banking system would be? Or better than a state-by-state monetary system? Or maybe just compared with alternative policy decisions the Fed could have made, like targeting NGDP or strictly following the Taylor Rule?
And this just emphasizes the importance of baselines. When we’re evaluating policies and institutions, we should weigh not some abstract cost benefit analysis (whatever that would mean), but a comparison to real alternatives. This is the crucial point Scott Sumner makes when considering whether the Fed caused the Great Recession: clearly, the short fall in demand was not entirely the Fed’s fault. But it was reasonable to expect the Fed to continue its long-term policy of keeping nominal growth the same, and so when they failed to do so they caused the major problems our economy is suffering through now. Karl Smith makes a similar point during his interesting bloggingheads with Matt Yglesias, arguing that evaluating health care systems based on a comparison to a free market in health care is almost irrelevant because there’s no precedent for or much possibility of such a market starting up. Instead, we should consider the “real choice… between an stingy government run sector that actually spends less money on health care or a less stingy government subsidized sector that spends more money on health care.” I’m not sure I’m as pessimistic about all libertarian reforms, but sometimes perfect is the enemy of the good.