Computers in power

On April 7, The New York Times printed an opinion piece written by T.J. Rodgers, chief executive of Cypress Semiconductor, which proclaimed that "A Computer Would Do Better Than the Fed."

Better than the Fed? What kind of looney comes up with stuff like that?

A brief Internet search reveals that he double majored in physics and chemistry at Dartmouth, where he was Salutatorian. He's about 51 years old and holds masters and doctorate degrees in electrical engineering from Stanford. He founded Cypress Semiconductor in 1982, and for Cypress' growth he has won all kinds of awards and made all kinds of money.

Not exactly a lightweight.

And an intense guy too, apparently. He played football at Dartmouth and still runs four to six miles a day. He speaks feverishly about the horrors of Big Government — and preaches lower taxes, more government investment in education and higher immigration limits to meet our labor shortages in certain sectors.

So I paid more attention to the argument than I might have ordinarily.

His argument centers around the unpredictability of Alan Greenspan's announcements. The last time Greenspan was on TV, a lot of investors expected him to lower the Fed Funds rate by half a point. He ended up lowering it by only a quarter point, and so the market went nuts, as it tends to do.

Crazy markets are inefficient; better to let them adjust based on a predictable mechanism for setting the key rates. If a war or crisis happens, someone can step in to make necessary adjustments, but otherwise the economic indicators should set the rate.

The problem with this argument is that the Fed has to be as independent as possible from electoral politics to be effective. It's scary enough listening to candidates throw around ideas for ten-year tax cuts when they can't predict tax revenues for more than a year in advance. Can you imagine if these goofballs got to throw around interest rate proposals?

..."Let's change the interest rate equation in a way that's fair for ALL Americans!"

It's too easy to picture. The Fed is its own institution, but an equation is too easy to criticize and too easy to change by Congressional action. It's much easier to criticize an algorithm than a real person — the algorithm can't fight back.

The fewer important things left to politicians' discretion the better. But let's say that if we implement Rodgers' idea, we will be sure to make the officials who tinker with the equation basically independent of political influence.

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Well, gee, isn't that essentially what the Fed is? I mean, I'd be surprised and disturbed if Greenspan doesn't have a couple computers cranking out economic indicators and telling him what our economy needs. And I'm assuming it's not a couple old Apple IIgs boxes either. Supercomputers. Programmed by really smart econometricians. Isn't Greenspan likely to take all the projections and decide what most accurately reflects the current situation?

But that's not really fair because Rodgers isn't really saying that we should replace Greenspan with a laptop. He's saying the Fed should stop surprising investors. Publish the formulas, explain the logic. Let us know what the precise plan is ahead of time and everything will be fine, because we'll have more information to go on.

Markets are unpredictable because too many people invest in businesses they don't understand. The price of a stock always reflects supply and demand for that stock, but ideally — i.e., if investors are all really smart — that should level out in such a way that the firm's yearly profits represent a certain return on the stock price. A bit higher than the interest rate, plus a little more to cover inflation, plus a little more to cover risk. This never happens perfectly because the very act of investing increases a stock's value, so people either try to outguess each other or assume that a rising stock will continue to rise.

But the interest rate plays a big role in many of the fluctuations that we see in the Dow Jones and NASDAQ as investors switch among and between various stocks and bonds to maximize their return. Rodgers' theory is that since investors will make their adjustments as soon as the interest rate changes, we might as well let everybody know ahead of time. That way nobody will make investments based on anticipation, leading to increased efficiency.

And right now, it's hard to say he's wrong. Joe Dague '01 is a politics major from Carlisle, Pa. He can be reached at joedague@princeton.edu.