123 – Adam Posen on Trade, Inflation Targeting, and Central Bank Independence

Episode Summary

Executive Summary: Adam Posen discusses his path into economics, the structure and culture of central banking, and his evolving views on inflation targeting and central bank independence. He argues that institutions matter, but only within deeper political and social consensus, and warns that Trump-era trade and investment policies are undermining long-run U.S. growth, foreign direct investment, and the dollar-centered global system.

Main Topics: Posen’s path into economics (Priority: 3/5): Posen explains how his parents’ scientific training and emphasis on evidence, relevance, and intellectual honesty shaped his interest in economics, public policy, and eventually central banking and think tanks. How the Bank of England MPC differs from the Fed (Priority: 5/5): He contrasts the Bank of England’s small, discussion-driven Monetary Policy Committee with the Fed’s larger, more hierarchical FOMC, highlighting freer debate, different dissent norms, and a different political culture around oversight. QE and crisis-era policy at the Bank of England (Priority: 5/5): Posen describes becoming an early and persistent advocate for additional quantitative easing after 2009, eventually helping shift the MPC toward more expansionary policy as the UK recovery remained fragile. Inflation targeting: success, overreach, and symmetry (Priority: 5/5): He revisits the inflation targeting framework he helped develop with Bernanke and Mishkin, arguing it was a useful pragmatic compromise but became too dogmatic and asymmetrically focused on preventing overshoots. Central bank independence as overrated but still useful (Priority: 4/5): Posen argues that central bank independence is not a magical institutional fix; it reflects underlying political preferences for low inflation and can be reversed if it conflicts too long with society’s wishes. Trade war, foreign direct investment, and the post-American economy (Priority: 5/5): He warns that Trump’s anti-globalization policies are already depressing foreign direct investment in the U.S., weakening long-term growth prospects, and eroding trust in the American-led economic order. Safe assets and the dollar system (Priority: 4/5): Posen connects U.S. policy uncertainty to global demand for safe assets, arguing that the dollar’s privileged role depends on trust in the U.S. institutional and geopolitical framework.

Key Arguments: Evidence-based policy is more important than cleverness; think tanks should prioritize being right and relevant over being novel for its own sake. The Bank of England MPC’s smaller, less theatrical format enables freer debate and can produce more thoughtful monetary policy than the Fed’s more hierarchical process. Posen’s early support for more QE reflected the view that the UK was leaving output and employment on the table and that further easing had low downside risk. Inflation targeting was originally a pragmatic compromise that improved transparency and discipline, but it became overly formalized and treated almost as a religion. Once inflation targeting became entrenched, central banks became reluctant to allow even temporary overshoots, making the regime asymmetrical and potentially slowing recoveries. Central bank independence matters, but only because it reflects broader social and political preferences; it is not a standalone cure for inflation or weak policy. The post-2016 decline in U.S. foreign direct investment suggests firms are already adjusting to Trump-era uncertainty, tariffs, and policy arbitrariness. Trade conflict and arbitrary executive intervention can reduce the U.S. as a destination for long-term capital, harming productivity, wages, and growth. The U.S. dollar’s role as the dominant safe asset is durable but not permanent; continued politicization of economics and security could erode global confidence. The long-run consequences of today’s policies are already visible in lower investment, lower productivity growth, and reduced dynamism in the U.S. economy.

Data Points: Bank of England MPC voting structure: 9 members total; 5 internal members and 4 external members - Posen explains the committee design and how it differs from the Fed’s FOMC. Posen’s Bank of England tenure: 2009 to 2012 - He served as an external voting member during the post-crisis period. QE vote pattern: 8-1 against him initially, later 9-0 in favor - He says he was a lone dissenter for several meetings before the committee shifted toward more easing. Pound depreciation: about 25% trade-weighted - He cites the sterling decline in 2008-2009 as a key factor behind higher UK inflation. Inflation pass-through estimate: 6 to 8 to 1 - Posen’s forecast for how exchange-rate depreciation would translate into inflation in the UK. Bank staff view on pass-through: well below 10 to 1, up to 21 - He says staff and insiders believed inflation pass-through would be much lower. Net FDI in the U.S. since 2016: down 75% by Q1 2018 from Q1 2016 - Posen uses Commerce Department data to argue that foreign investment is falling sharply under Trump-era policies. Publication timeline for inflation targeting book: finished in 1997; published in 1999 - He describes the timing of the Bernanke-Mishkin-Laubach-Posen project. Central bank independence anniversary: 20 years - He references the 20-year anniversary of Bank of England operational independence. Public appearances in the UK: around 10,000 people - Posen notes he spoke to roughly 10,000 British citizens during his MPC tenure.

Pivotal Quotes: "“It’s more important to be right than to be clever.”" — Adam Posen: He describes the Peterson Institute’s research culture and think-tank mission. "“The long run is there. It’s no longer there are ants in the foundation. It’s there are cracks in the walls.”" — Adam Posen: He warns that current U.S. policy choices are creating visible long-term damage. "“The intellectually honest pro-globalization people.”" — Adam Posen: He summarizes the Peterson Institute’s self-conception and policy orientation.

Implications: Listeners should see central banking and trade policy as deeply political, not purely technical. Posen’s warnings imply that weakening institutions, deterring investment, and politicizing the dollar system could lower growth and global stability for years.