The Federal Reserve is shrouded in obscurity. That’s partly its fault—but it’s partly progressives’ fault, too.
Bored by the proceedings at the Republican National Convention in St. Paul one day in 2008, I decided to try to gather some color down the road in Minneapolis, where Ron Paul and fellow dissident conservatives and libertarians were holding a counter-convention at the Target Center. At one point a speaker thundered that Barack Obama and John McCain “both have a lot to learn about Austrian business-cycle theory.” The crowd went delirious with cheers, and soon chants of “end the Fed” echoed throughout the arena.
It was funny at the time. A bunch of cranks talking about their crank monetary theories and espousing a crank prescription.
Today, Paul is the chairman of the House Subcommittee on Monetary Policy.
And though the House GOP presumably won’t be pressing the full Paul agenda of eliminating the Federal Reserve System and returning the United States to the gold standard, his ascension to the job isn’t a pure coincidence, either. House Republicans don’t assign chairmanships by strict seniority, and in the past, GOP leaders had kept Paul away from too prominent a role in monetary matters. Now he’s getting a seat at the table and Paulite views that see the Fed as pursuing dangerously inflationary policies are moving toward the mainstream.
As recently as 2009, the Federal Reserve’s emergency efforts to keep the economy afloat were sufficiently uncontroversial that Time named Chairman Ben Bernanke its Person of the Year. Earlier that summer, Barack Obama chose to reassure markets by leaking—well in advance of the need to make a decision—that Bernanke would be reappointed to lead the central bank. And yet, by the time the confirmation vote was actually held in late January 2010, Bernanke got in by a margin of just 70-30, the slimmest of any Fed chief ever. That nearly half of Senate Republicans voted no is especially striking when you consider that he was originally put in the job by George W. Bush, had previously chaired Bush’s Council of Economic Advisers, and before that had done an earlier stint in a lesser Fed role, again at the behest of Bush.
At the time it was possible to interpret this reversal on the part of so many GOP senators as just another sign of partisanship run amok: They were opposing him simply because Obama was the one doing the nominating. But as the economy slowed again in 2010, and the Fed initiated a new round of so-called “quantitative easing” (QE)—central bank purchases of long-term Treasury bonds to increase the money supply and stimulate the economy—it became clear that Republicans were genuinely moving toward a critique of the whole idea of stimulative monetary policy. This was striking because stimulative monetary policy had been since Milton Friedman’s day the main conservative alternative to Keynesian fiscal stimulus.
In mid-November, the conservative economics think tank e21 released “An Open Letter to Ben Bernanke” complaining that his policies risked currency debasement and inflation. True, e21 is not itself a particularly influential or well-known institution, but the letter was co-signed by influential journalist/tactician Bill Kristol; Kevin Hassett from the American Enterprise Institute; Douglas Holtz-Eakin, founding president of the new American Action Network, intended to be the right’s answer to the Center for American Progress; and other heavy hitters. Shortly thereafter, Indiana Congressman Mike Pence and Tennessee Senator Bob Corker, both Republicans, joined the party, criticizing quantitative easing and urging that the Fed’s mandate be shifted from its current dual focus on inflation and employment to a single focus on price stability.
On the merits, these conservative complaints are absurd. After then-Fed Chairman Paul Volcker and Ronald Reagan beat inflation in the early 1980s, annual increases in the Consumer Price Index (CPI) hovered around 4 percent per year for the rest of the decade. After the recession of the early 1990s, the Fed held inflation mostly below 3 percent for almost 20 years. Since the onset of the Great Recession in December 2007, the CPI’s rate of increase has been steadily lower than even that. At the same time, unemployment has been sky-high, real growth has been first negative and then disappointingly slow, and overall consumer demand has been well below the pre-crisis trend. The idea that a time of unusually high unemployment and unusually low inflation would be a good moment for monetary policy-makers to start caring less about growth and more about price stability, especially when we already have price stability, is bizarre.
In response, Paul Krugman has called on progressives to “denounce Republican attacks on the Federal Reserve and defend the Fed’s independence.” But we need something better than a simple circling of the wagons around the powers that be. After all, people are angry for the very good reason that economic performance is currently very bad. And unlike a lot of the targets of popular anger in the Obama era, from autoworkers to hedge fund managers, America’s central bankers are in fact the ones who are supposed to deliver decent macroeconomic outcomes.
Most important, for all the flaws in the right’s current critique of the Fed, they’re correct to point to the need for accountability. The idea of a central bank that’s “independent” of day-to-day politics is a good one, but too often that’s come to mean a central bank that’s immune from criticism or meaningful supervision. The Federal Reserve System’s current vague mandate needs to be replaced with a specific target, defined in law. The public and the politicians we elected need to be prepared to hold the system accountable for achieving the target, and Congress needs to accept responsibility for picking a target that leads to good outcomes. Most of all, progressives need to start caring about the Fed and engaging in the debate over what it does.
The Fed and Its Works
Post a Comment