The Fed's Richard Fisher and Affordable Family Formation

Richard W. Fisher, president of the Federal Bank of Dallas
Jean Ayissi | AFP | Getty Images
Richard W. Fisher, president of the Federal Bank of Dallas

Dallas Fed president Richard Fisher honored the 100th anniversary of Ronald Reagan's birth by recalling a good joke that Reagan used to tell:

Paddy McCoy, an elderly Irish farmer, received a letter from the Department for Works and Pensions, stating that he was suspected of not paying his employees the statutory minimum wages and that an inspector would be sent to the farm.

On the appointed day, the inspector turned up. Tell me about your staff, he asked of Paddy.

Well, said Paddy, there is the farmhand. I pay him 240 a week and he has use of a free cottage.

That's good, said the inspector.

Then there's the housekeeper. She gets 190 a week, along with free board and lodging.

That sounds fine, said the inspector.

Paddy went on. There's also the half-wit. He works a 16-hour day, does 90 percent of the work, nets about 25 pounds a week when all is said and done, but takes down a bottle of whiskey and, as a special treat, occasionally gets to sleep with my wife.

That's disgraceful, Paddy, said the inspector. I need to interview the half-wit.

Well, said Paddy, you're looking at him.

The main point of Fisher's speech to the Stemmons Corridor Business Association in Dallas, Texas was the importance of fiscal and regulatory policy. It was, in other words, the party line that has been coming out of the Fed for several months now: politicians are relying too much on monetary policy to accomplish economic goals.

Fisher attacked what he calls Congress' fiscal nonfeasance — its unwillingness or inability to address America's economic challenges, both long-term (mounting debt) and short-term (persistent unemployment). He goes on to voice his worry that the Fed is actually becoming an accomplice to the failure, by maintaining such an accommodative monetary policy.

This warning led directly into what was the main headline story from his speech: the announcement that he will vote against any further quantitative easing.

Fisher made two arguments for the primacy of fiscal and regulatory policy over monetary policy. First, he pointed out that the Fed cannot monetize debt that is not created by Congress. If the government weren't borrowing so much, the Fed could not convert that debt into money by buying up Treasurys.

Second, Fisher argued that regulatory policy plays the dominant role in creating differences in the economic performances of the states:

A look within the United States makes clear the overriding influence of fiscal and regulatory policy. Monetary policy is uniform across the 50 states; the base rate of interest paid on a business or consumer loan or a mortgage in Michigan, California, Ohio or New York is the same as that paid in Texas. Yet there is a reason that Michigan and California each lost more than 600,000 jobs over the past decade while Texas added more than 700,000 over the same period. There is a reason that the population of Ohio grew by only 183,000 residents over the past 10 years, while Texas grows by that number every five and a half months. There is a reason that with each passing census, the state of New York has been losing congressional seats and Texas has been adding them; a reason that, in the recent census, California failed to gain any while Texas gained four. There is a reason that, as documented in the Jan. 12 issue of the Wall Street Journal, college graduates, the best and brightest of the successor generation, are leaving New York and Cleveland and Detroit and moving to Austin, Texas. There is a reason no state in the union houses more Fortune 500 headquarters than Texas. There is a reason for the disparate employment growth that has taken place in the 12 Federal Reserve districts over the past two decades, data that are documented in the graph at your place setting.

This has prompted an angry response from Ryan Avent of "The Economist":

Why has population grown so rapidly in Texas and slowly elsewhere? Here's economist Ed Glaeser:

The Sun Belt pattern of low prices and abundant construction can mean only one thing: an abundant and elastic supply of housing. Demand for new housing, due to either sunshine or economic success, isnt driving Sun Belt growth; low prices belie that explanation. Rather, in the growing regions, even modest demand creates far more new construction, and population growth, because supply responds so enthusiastically.

In Texas, the lack of regulation that matters is control over construction of new housing. Elastic housing supply turns a small increase in demand for Texas life into a large population rise.

I think both Fisher and Avent are both over-stating the role of policy here. While land-use restrictions — such as anti-sprawl regulation or zoning rules — can result in supply restrictions on housing, the main advantage Texas cities have over Californian cities is topographical.

San Francisco is surrounded by saltwater and mountains, while Dallas is surrounded by flat dirt, Steve Sailer explains.

This means that it is far easier and cheaper to build houses around Dallas than it is around San Francisco. And the availability and affordability of housing is a key factor in explaining population growth. Where housing is affordable, it is more affordable to start a family.

This may seem obvious. But the central role of affordable family formation had to be explained by Steve Sailer at great length, and it is still foreign to many economists and journalists. One reason, I think, that the concept remains foreign to many is that it doesnt avail itself of the usual left-right, regulate-deregulate policy paradigms.


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