As a precursor to this October’s inaugural Economic Education Month, the Economic Education Group of the Federal Reserve held a virtual Q&A session between Federal Reserve Chair Jerome Powell and a variety of students and teachers from across the country.
This education group includes over 50 subject matter experts who serve the outreach arm of the Fed. Their goal is to:
…teach economics and personal finance while helping students and the public gain real-life skills to increase their economic literacy and financial acumen.
This outreach doesn’t include teaching of Austrian economics; however, Powell sheds some light on one of the possible reasons why, claiming:
Economics also looks at how individual people and small and large businesses make their decisions and gives us the analytical tools to make assessments like that.
According to him, economics has ventured into the psychology behind human behavior. The economist seeks to know “how” decisions are made, then uses models or “analytical tools” to create economic plans like the Fed’s Dual Mandate to control inflation and unemployment.
Interventionist ideas may explain why Austrian economics isn’t being taught by the Federal Reserve. As Powell later elaborates on the Fed’s action, the:
Federal Open Market Committee -- which sits here in this room where I am -- sets a target range for the federal funds rate, and then we use our monetary policy tools to implement the policy. These steps influence interest rates and overall financial conditions throughout the economy and thereby interest…
It sounds like ambitious (and unnecessary) work, but he told students he wants:
…people to understand that we’re a small part of the overall picture of our very large and dynamic economy…
Yet the Fed holds the monopoly on the US dollar, controls interest rates, has a balance sheet of $8.3 trillion and plays a significant role in creating asset bubbles, among other things. So to say the Fed is only a “small part” of the US economy is disingenuous.
Luckily, a high school teacher asked about one of the biggest problems which has plagued economics for generations:
How can teachers best bridge the gaps between economic theory, for example, the Phillips Curve, and our students’ real-life experiences?
That economists still consider the Phillips Curve relevant stands as a testament of the state of mainstream economics. In other fields of study, like physics, theories are developed, such as the theory of gravity, and this theory must work at all times and be relied upon until someone else proves the theory wrong.
However, the Phillips Curve does not work 100% of the time, and has no function in reality as it was proven obsolete many degrades ago. In no way has this caused the model to be abandoned by mainstream economists.
It is nonsensical for any desire to “bridge the gaps” between economic theory and our daily lives to exist if the theory is unworkable or irrelevant. Yet the theory persists for reasons unknown even to the Fed Chair. After a lengthy reply which had little to do with the question, he finally said:
I mean, you mentioned the Phillips Curve. You know, it’s the relationship between employment and inflation. I think -- I think you could explain that in terms that people would understand just around, you know, job -- the way inflation moves up and what it does in the economy and, you know, the prevalence of jobs, the tightness of the labor market. So, I’ll think some more about that one.
Many questions were asked, with few credible answers given. But from Powell’s perspective, what does it matter? So long as his job doesn’t require asking difficult questions which could put his position at risk, he will allow faulty economic models to persist, while reality is forced to fit his mold.
