End Kiwi Tyranny!

New Zealanders control the global economy. This has to stop.

A kiwi. New Zealanders’ nickname derives from the bird, not the fruit, which is actually native to China and known in New Zealand as “kiwifruit.”

Psst. You didn’t hear it from me, but Kiwis secretly control the global economy.

First, a little background. The 1913 Federal Reserve Act created, in the United States, a central bank whose purpose was “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” Since stable prices and moderate long-term interest rates are inextricably linked, this became known as the “dual mandate”: Keep unemployment and inflation low. Note that “maximum employment” is the very first goal mentioned.

But in 1958 an economist from, yes, New Zealand named A.W. Phillips wrote a paper that invented something called the Phillips Curve. The Phillips curve says you can have high unemployment or you can have high inflation but you can’t have both. This principle was called severely into question during the Great Inflation of the 1970s when, in fact, we did have both. But economists made a few tweaks and some version of the Phillips Curve continues to drive Fed policy: To bring inflation down, unemployment must go up.

Fed Chairman Paul Volcker killed off the Great Inflation with severe monetary tightening in the early 1980s (though some contend the real savior was the oil-price collapse). After that, the dual mandate went into a deep slumber and the Fed stopped even pretending to aspire to full employment. Fed Chairman Ben Bernanke kinda-sorta revived the dual mandate as he tried to pull the economy out of the Great Recession of 2007-9, but really, the Fed is never going to care all that much about unemployment because its main constituency, the banks, don’t care all that much about unemployment.

The Fed essentially jettisoned the dual mandate in 2012 when it adopted an inflation target of 2 percent. Why an inflation target but no unemployment target? And why 2 percent? Blame, again, New Zealand. In 1988 New Zealand’s finance minister blurted out on TV what he wanted the inflation rate to be. As a result, New Zealand’s central bank felt obliged to back him up publicly by announcing a 2 percent inflation target. The other central banks around the world quickly decided they had to fall in line with inflation targets of their own, nearly all of them at the exact same 2 percent. The Fed, acting in 2012, was actually a bit late to surrender to Kiwi hegemony.

In my latest New Republic article I argue that we free ourselves from this monetary hobbit-hole and either raise the inflation target to 3 percent or (better yet) restore the dual mandate by jettisoning the inflation target altogether and replacing it with a misery-index target. The misery index, you’ll recall, was a concept invented by the economist Arthur Okun that simply added the unemployment rate to the inflation rate. Jimmy Carter used a misery index of 12.7 to club Gerald Ford like a baby seal in the 1976 election, and Ronald Reagan used a misery index of 19.7 to club Carter like a baby seal in 1980. As you can see, it’s a powerful little indicator. The misery index at the moment is quite low, at 6.7—another sign that Bidenomics is working. I like New Zealanders as much as the next guy but we shouldn’t let them rule the universe. Anyway, you can read my New Republic piece here.