The Senate Banking Committee just voted 14 to 8 to confirm Janet Yellen’s nomination to be the new Chair of the Federal Reserve. She will likely go on to be confirmed by the full Senate.

Much of the coverage has focused on Yellen as a person, when the real story is on the Fed as an institution. Sometimes individuals have profound influence on Fed policy, such as Paul Volcker in the late 1970s and 1980s. Over time, however, the institutional structure of the central bank and the incentives facing policymakers matter more.

The Federal Reserve famously has a dual mandate of promoting maximum employment and price stability. The Federal Open Market Committee, which sets monetary policy, has great discretion in weighting the two policy goals. As a practical matter, the vast majority of the time, full employment receives the greater weight. That is because the Fed is subject to similar pressures as are the members of Congress to which the Fed must report. In the short run, voters want to see more job creation. That is especially true today. The United States is experiencing weak growth with anemic job creation.

Never mind that the Fed is not capable of stimulating job creation, at least not in a sustained way over time. It has a jobs mandate and has created expectations that it can stimulate job growth with monetary policy. The Fed became an inflation-fighter under Volcker only when high inflation produced strong political currents to fight inflation even at the cost of recession and job creation.

The Federal Reserve claims political independence, but it has been so only comparatively rarely. Even Volcker could make tough decisions only because he was supported by President Carter, who appointed him, and President Reagan, who reappointed him. Conventionally defined inflation is low now, so the Fed under any likely Chair would continue its program of monetary stimulus. Perhaps Yellen is personally inclined to continue it longer than might some other candidates. But all possible Fed chiefs’ would face the same pressures to “do something” to enhance job growth, even if its policy tools are not effective.

The prolonged period of low interest rates has made the Fed the enabler of the federal government’s fiscal deficits. Low interest rates have kept down the government’s borrowing costs, at least compared to what they would have been under “normal” interest rates of 3–4 percent.

Congress and the president have been spared a fiscal crisis, and thus repeatedly punted on fiscal reform. They are likely to continue doing so until rising interest rates precipitate a crisis. How long that can be postponed remains an open question.

1) For any given growth rate of aggregate spending, lower actual rates of price and wage inflation mean higher levels of output and employment;

2) For any given growth rate of aggregate spending, higher expected rates of price and wage inflation mean lower levels of output and employment;

3) An increase in the growth rate of aggregate spending is not the same as an increase in the equilibrium rate of inflation;

4) An increase in aggregate spending succeeds in raising the rate of inflation only in so far as it fails to increase output and employment.

I submit these old-fashioned monetarist heresies for the consideration of all those who think that an increased target rate of inflation will help us out of our present economic quagmire.

There’s been much ink spilled the past few days over U.S. Secretary of Education Arne Duncan’s defense of the Common Core, delivered as an obnoxious attack on white, suburban women. Proclaimed Duncan to a meeting of the Council of Chief State School Officers (one of the Core’s progenitors):

It’s fascinating to me that some of the pushback is coming from, sort of, white suburban moms who — all of a sudden — their child isn’t as brilliant as they thought they were and their school isn’t quite as good as they thought they were, and that’s pretty scary.

Much of the uproar over Duncan’s attack has been over his injecting race and sex into the Common Core debate, and that certainly was unnecessary. But much more concerning to me – and indicative of the fundamental problem with federally driven national standardization – is the clear message sent by Duncan’s denunciation of Jane Suburbia: average Americans are either too dull or too blinkered to do what’s best for their kids. The masses need their betters in government – politicians, bureaucrats – to control their lives.

Alas, this has been a subtext of almost the entire defense of the Core. Every time supporters decide to smear opponents primarily as “misinformed” or “conspiracy theorists,” they imply that people who are fighting for control of what their children will learn are either too ignorant, or too goofy, to matter.

Of course, there are some opponents who don’t get all the facts right about the Common Core, but supporters ignore that many of these people are just finding out about the Core. Unlike major Core supporters, many opponents – often parents and plain ol’ concerned citizens – haven’t been working on the Core for years. And even when opponents use such regretably over-the-top rhetoric as calling the Common Core “Commie Core,” they are ultimately making a legitimate point: the federally driven Core is intended to make the learning outcomes of all public schools the same – “common” is in the name, for crying out loud! – and in so doing, nationalize learning. At the very least, that’s not a move in the libertarian direction.

Every once in a while, Core supporters will openly air their basic distrust of average Americans. If you go to the 53:10 mark of our Common Core “Great Debate,” you’ll catch just such an admission by Chester Finn, president of the Core-championing Thomas B. Fordham Institute. In response to an explanation of how free markets enable average people to smartly consume things about which they are not experts, Finn declares that most parents won’t do even easy work to make informed choices. Then he asks, “is that a way to run a society?”

And there it is: In the end, Common Core, and all the government power behind it, is ultimately about experts running society rather than letting free people govern themselves. Why? Because parents – “the people” – are either thought incapable, or unwilling, of caring for their children themselves.

This attitude if fundamentally at odds with maintaining a free society. It declares that government must control what children learn, and in so doing gives government – not free people – the power over what the next generation of Americans will think. This is not to say that the Common Core is intended to inculcate values and attitudes – most supporters probably just want to better furnish skills – but it will nevertheless couple power over what the schools teach with an attitude that is fundamentally corrupting: I know what is best, and must make you do it. And if your betters think you can’t be trusted to teach your child about something as unthreatening as the ABCs, imagine what they may eventually require – or forbid – in teaching about religion, or guns, or climate change?

As has been the case in the past, Secretary Duncan has actually done Common Core opponents a huge favor in an effort to take them down. But this may be his most important contribution yet, revealing the supremely threatening contempt in which he seems to hold the average parent, and which drives the Common Core.

I must say I’m puzzled and frustrated by the many clueless responses, like this one by Dallas Fed President Richard Fisher, to those well-placed (mostly Keynesian) economists who have been insisting for some time that, with the unemployment rate still above 7%, and the latest (annual) inflation rate at just 1%, what the U.S. economy needs right now is a higher inflation target. Instead of 2%, they say, make it 4%, or even 6%. Those higher targets, they explain, can be be counted on to raise interest rates, rescuing us from the zero lower interest rate bound we’ve been stuck near, and thereby getting the unemployment rate back down to the Fed’s current goal of 6.5%, if not lower.

Should we take their advice? Heck, yeah! After all, this isn’t the first time that we’ve been in a situation like the present one. There was at least one other occasion when the U.S. economy, having been humming along nicely with the inflation rate of 2% and an unemployment rate between 5% and 6%, slid into a recession. Eventually the unemployment rate was 7%, the inflation rate was only 1%, and the federal funds rate was within a percentage point of the zero lower bound. Fortunately for the American public, some well-placed (mostly Keynesian) economists came to the rescue, by arguing that the way to get unemployment back down was to aim for a higher inflation rate: a rate of about 4% a year, they figured, should suffice to get the unemployment rate down to 4%–a much lower rate than anyone dares to hope for today.

I’m puzzled and frustrated because, that time around, the Fed took the experts’ advice and it worked like a charm. The federal funds rate quickly achieved lift-off (within a year it had risen almost 100 basis points, from 1.17% to 2.15%). Before you could say “investment multiplier” the inflation and unemployment numbers were improving steadily. Within a few years inflation had reached 4%, and unemployment had declined to 4%–just as those (mostly Keynesian) experts had predicted.

So why are these crazy inflation hawks trying to prevent us from resorting again to a policy that worked such wonders in the past? Do they just love seeing all those millions of workers without jobs? Or is it simply that they don’t care about jobs at all, just so long as inflation is low? Whatever the reason, they certainly come across like a bunch of callous dunderheads.

Oh: I forgot to say what past recession I’ve been referring to. It was the recession of 1960–61. The desired numbers were achieved by 1967. I can’t remember exactly what happened after that, though I’m sure it all went exactly as those clever theorists intended.

P.S.: I can already imagine Ken Rogoff’s response to this post. Something to the effect, no doubt, of “This time is different.”

P.P.S. (November 20): Of course it is different this time–but not, I submit, in ways that clearly favor the doves. One particular difference that comes to mind is that, whereas in the 60s policymakers (implicitly) gambled that an increase in the actual rate of inflation would not lead to a corresponding increase in the expected rate (and, hence, in the rate of upward or leftward movement of short run aggregate and labor supply schedules), those calling for a 4–6% inflation target today actually see it as a means for achieving a like increase in expected inflation, and so are (implicitly) gambling that such an increase in expected inflation will not result in any corresponding increase in the rate of upward or leftward movement of short-run aggregate and labor supply schedules.

I leave it to my readers to decide for themselves whether the new wager is more or less rash than the old one.

My new study on the Transportation Security Administration mainly focuses on the agency’s poor management and performance. The TSA has a near monopoly on security screening at U.S. airports, and monopoly organizations usually end up being bloated, inefficient, and providing low-quality services. 

The study proposes contracting out or “privatizing” airport screening, which is the structure of aviation security used successfully in Canada and many European countries.

I briefly discuss some of the civil liberties problems surrounding TSA. Note that Cato’s Jim Harper also addresses those issues in his work, as does Robert Poole of Reason Foundation. I noticed this recent blog post by Poole that nicely summarizes some of the realities of TSA, terrorism, and civil liberties:

A couple of years ago Jonathan Corbett, a tech entrepreneur from Miami, posted videos online showing him successfully passing through TSA airport body scanners with a metal box concealed under his clothing, seeking to demonstrate that the scanners are an ineffective replacement for walk-through metal detectors for primary screening. In 2010 he filed a lawsuit contending that body-scanning and pat-downs are both unreasonable searches that violate the Fourth Amendment.

As part of the discovery process, TSA provided Corbett with 4,000 pages of documents, many of them classified. He was allowed to produce two versions of his brief, one containing extracts of classified material, and available only to the court, and a heavily redacted version which could be made public. But as several news sites reported last month, a clerk in the US Court of Appeals (11^th District) mistakenly posted the classified version online, and it was quickly noticed and reproduced on various websites. Although the court issued a gag order prohibiting Corbett from talking about the classified material, there was no way to stop others from doing so.

Among the things we’ve learned from TSA Civil Aviation Threat Assessments that Corbett cited in his brief are the following:

• “As of mid-2011, terrorist threat groups present in the Homeland are not known to be actively plotting against civil aviation targets or airports; instead, their focus is on fund-raising, recruiting, and propagandizing.”
• No terrorist has attempted to bring explosives onto an aircraft via a U.S. airport in 35 years, and even worldwide, the use of explosives on aircraft is “extremely rare.”
• There have been no attempted domestic hijackings of any kind since 9/11.
• The government concedes that it would be difficult to repeat a 9/11-type attack due to strengthened cockpit doors and passengers’ willingness to challenge would-be hijackers.

Based on these points, Corbett argues that primary-screening searches via body-scanners or pat-downs are unreasonable under the Fourth Amendment. He agrees that although those searches have not turned up any would-be terrorists, they have detected illegal drugs. But that is irrelevant to aviation security, which is the only purported rationale for such intrusive searches without prior probable cause.

Corbett does not directly address whether the whole array of TSA airport screening measures may have deterred attacks that might have happened without those measures in place. But that is the kind of question that can be—and has been—assessed quantitatively by security experts such as Mark Stewart and John Mueller, whose work I have cited several times in previous issues of this newsletter. And those assessments suggest that body scanners and Federal Air Marshals, among other measures, cost vastly more than they are worth.

Whatever the outcome of Corbett’s suit—and I hope he prevails—Congress needs to take a hard look at the cost-effectiveness of much of what TSA is doing, in light of the revelations inadvertently made public by this case.”

Poole has done superb work over the years, not only on airport screening, but also on airport and air traffic control privatization. Bob’s work can be found here, and our joint article on airports and ATC is here.

Hans Riegel recently died at age 90. He changed the world for the better. He brought us the treat known as gummi bears. 

Politicians routinely crusade against wealth and inequality, but that occurs naturally when people create products and offer services benefiting the rest of us. 

Today people live on their cell phones. Once we didn’t even have telephones. Thank Alexander Graham Bell, born in Edinburgh, Scotland. 

The internal combustion engine auto came from Karl Benz. He was a design engineer who in 1886 won a patent for a “motor car.” 

In 1903, Clarence Crane created the hard fruit candy known as Life Savers. 

Helen Greiner, a fan of Star Wars’ R2D2, came up with the Roomba vacuum cleaner robot in 2002. 

John Mauchly and John Eckert created the first computer in 1946—the Electronic Integrator and Computer, or ENIAC. 

Thomas Edison gave us working light bulbs in 1879. Joseph Swan might have beaten Edison, but the latter bought Swan’s patent. 

The 3‑D printer was created in 1983 by Chuck Hall. His first creation: a tea cup. 

General Electric engineer James Wright attempted to make artificial rubber during World War II. He failed, but ad man Peter Hodgson later discovered the malleable material and began selling Silly Putty.

While developing magnetrons for radar in World War II, Percy Spencer noticed that a candy bar in his pocket melted. The result was the microwave oven.

Credit for television goes to Russian émigré Vladimir Zworykin. In 1920 he developed an iconoscope, or television transmission tube, and kinescope, a television receiver. 

That same year Austrian Eduard Hass developed the peppermint candy, “pfefferminz” in German, known as PEZ. 

The Scottish Charles Macintosh came up with the waterproof Mackintosh Raincoat. A store clerk turned chemist, in 1823 he figured out how to make waterproof fabric.

Infections once were common killers. But in 1928 another Scot, Alexander Fleming, discovered penicillin.

Edward Binney and Harold Smith owned an industrial pigment company and in 1903 combined industrial pigments with paraffin wax. By 1996, 100 billion crayons had been produced.

In 1935, Frederick McKinley Jones developed portable air-conditioning for trucks. Jones became the first African-American elected to the American Society of Refrigeration Engineers.

John Pemberton, an Atlanta pharmacist, developed Coca Cola’s original formula in 1885, in response to a ban on the sale of his wine-coca “patent medicine.” 

Canadian-born James Naismith studied theology and worked at a Massachusetts YMCA. In 1891, he relied on a childhood game to develop basketball as a sport to be played indoors in the winter. 

In 1884, Lewis Waterman developed the fountain pen. He took ten years to perfect his invention.

Arthur Fry gave the world the “Post-It Note” in 1974. He was both a chemist at 3M and wanted a bookmark that would cling to church hymnal pages. He thought of a failed glue created by a colleague. 

Ruth Wakefield, regionally famous for her cooking, ran out of baker’s chocolate while making cookies and in 1930 substituted chunks of semi-sweet chocolate. Her recipe increased chocolate sales and became known to Nestle, which consequently created chocolate chips. 

In 1964, while seeking a new synthetic fiber, Stephanie Kwolek came up with the well-nigh indestructible Kevlar—commonly part of bullet-proof vests.

John Harvey Kellogg was a vegetarian who headed a Michigan sanitarium. Faced with wheat gone stale, in 1894 he processed it into dough anyway and ended up with flakes.

These are just a few of the inventions which surround and enrich us. Human creativity and ingenuity—punctuated with a mix of luck and hard work—constantly transform our lives.

As I pointed out in my latest Forbes online column:

Few things better illustrate Adam Smith’s axiom that people can simultaneously benefit the rest of us while pursuing their own interest. Of course people should do good. But they often do best while trying to advance themselves. 

Some inventors just love to create. Others hope for money, glory, or something else. Whatever their motives, the rest of us gain.

Like being able to enjoy gummi bears. Hans Riegel, RIP!