PART 2: OUR WORK
A Competition of Ideas
ECONOMISTS NEED FREEDOM TO CHALLENGE POLICYMAKERS
By Christopher J. Waller, Senior Vice President and Research Director
The Research division of the Federal Reserve Bank of St. Louis has long been renowned for its cutting-edge research, policy analysis and provision of economic information to the public. This tradition dates back to the 1960s, when Homer Jones was the director of the Bank's Research division. At that time, the St. Louis Fed took a very contrarian stance on how monetary policy should be conducted and backed that stance with top-flight economic research.
Although theoretical arguments are necessary to win the war of ideas, empirical evidence is needed to support those theories. That requires data. Hence, for more than 50 years, the Research division has melded the collection and analysis of relevant data with frontier economic research to support the Bank's presidents in their monetary policy role.
Most of our research is in the academic tradition, in which we encourage economists to identify and pursue good research questions on their own. The objective of academic research is to expand the boundaries of knowledge about economics and policy. Thus, for the most part, we encourage our staff economists to pursue their own ideas, rather than tell them which questions to work on.
We have found that the best policy advice comes from economists who work at the frontier of economic thinking. Academic economists are often vocal in their views about policy and are willing to critique actions taken by the Federal Open Market Committee, the main policymaking body of the Federal Reserve System. To evaluate arguments of academic critics and make use of good ideas and research for policy, the Fed must have economists who work at the frontier of knowledge. Fed economists must be able to explain their own views in a rigorous way, as well as explain why an alternative claim about policy is suspect. A healthy competition of ideas allows the best theories and policies to win in the end.
At the St. Louis Fed today, we largely eschew "directed" research. That is, we rarely tell one of our economists to answer a specific question, let alone to do so in a very short period of time. (An example of a directed research question would be: Why did labor force participation rates drop so much last month? The economist would track current economic data, particularly local conditions, and tell a narrative to explain the data movements.) Until the 1960s, however, directed research was the norm throughout the Federal Reserve System. That changed in St. Louis under Jones, who believed that research should help guide monetary policy and to do so meant adopting an academic-style research focus. He demanded that the Bank's economists be at the forefront of economic thinking.
Academic research is valuable because the thinking about economic issues is unrestricted. It is proactive in that it often focuses on interesting issues long before they come to the attention of policymakers. For example, in 2000, few would have thought that studying the housing market was relevant for monetary policy. Eight years later, housing was at ground zero. By that point, it was too late to start doing research on the topic. Proactive research was required.
Academic research is rigorously vetted before publication in peer-reviewed journals. It is forged in the fires of debate and criticism. Academic research also takes the form of program evaluation (economic autopsies) of major economic events. It can take years to analyze and understand what happened and what policies or regulations need to be changed. In this sense, it is timeless.
In contrast, directed research is time-sensitive and reactive in nature. It often leads to quick and incomplete answers that are not vetted by the economics profession. Directed research is often done in the form of simpler analysis that involves the gathering and organizing of facts, combined with a clear-cut narrative. This sort of analysis is often satisfactory for answering questions of fact or when some information is required in short order, but such analysis is often not very deep. Furthermore, there is usually no post-mortem of the analysis; once the issue is off the front page, it is not looked at again.
Importantly, the basic information source for most directed research is often the academic literature. Consequently, high-quality directed research requires a deep understanding of academic research, which usually requires economists who are engaged in academic research at a high level.
The key takeaway is that both forms of research—academic and directed—are valuable; they are complements, not substitutes. The research staff at the St. Louis Fed engages primarily in academic research because that forms the basis for the directed research and policy advice that we provide to our president, our board of directors and the general public.