A risk-management approach to policy changes Of course, I realize that I could be wrong in my assessment. So let us consider how we should conduct policy when we don’t know for sure which scenario is really the one we face today. How can we avoid risking a repeat of either the stagflation of the 1970s or the slow growth of the 1930s? The problem, of course, is that policies that are optimal for the liquidity trap scenario would tend to generate higher inflation without significant reductions in unemployment if the structural impediments scenario were true. Conversely, policies that are optimal for the structural impediments scenario would leave the economy unnecessarily mired in depression and deflation if we were actually in the liquidity trap scenario. A middle ground proposal Fortunately, between these two extreme scenarios, there is a robust middle ground policy approach. The Fed could sharpen its forward guidance in two directions by implementing a state-contingent policy. The first part of such a policy would be to communicate that we will keep the funds rate at exceptionally low levels as long as unemployment is somewhat above its natural rate. The second part of the policy is to have an essential safeguard – that is, a commitment to pull back on accommodation if inflation rises above a particular threshold. This inflation safeguard would insure us against the risks that the supply constraints central to the structural impediments scenario are stronger than I think. Rates would remain low as long as the conditions were unmet.
In 2016, there were over 500 confirmed cases of measles, five times higher than at the turn of the century. If we turn from public health to economic and financial health, the costs of a lack of public trust and understanding are in many respects quite similar: expert advice and services may not be taken-up, worse alternatives may be sought out and contagious scare stories may be allowed to proliferate. Each of these has societal costs which may be significant. Financial exclusion (people excluded from access to core financial services and advice) remains pervasive in the UK. There are almost 2 million people in the UK without a bank account. 26  In the most deprived parts  (including parts of London, Manchester, Middlesbrough, Liverpool, Bradford, Birmingham and Glasgow), over a third of people do not have access to a bank account. 27  While not all of these problems can be  blamed on a misunderstanding and mistrust of finance, these are still depressing statistics. Many more people suffer the consequences, not of financial exclusion, but financial illiteracy. Studies have identified a range of ways in which this can adversely affect people’s financial health. Financial illiteracy is a key contributor to excessive indebtedness. in the run-up to the sub-prime crisis. 29  28  It is associated with an increased incidence of default, including  And illiteracy causes people to seek out high-cost, non-standard  sources of credit, the financial equivalent of alternative medicine.