There are good arguments on both sides of the Fed independence question. However, it’s not a good argument to point to times when the Fed made a mistake, and then suggest that things would have been better with less Fed independence. Here’s a Matt Yglesias tweet:
Regarding both Trump’s statements on Powell and Volcker’s new revelations about Reagan, Fed “independence” seems highly overrated to me.
America would be much better off if Obama had pressured the Fed into a more pro-growth stance in 2015-2016.
Yglesias is right that America would be better off if Obama had pressured the Fed into a more pro-growth stance in 2015-16. Indeed that mistake probably cost Clinton the election. But that’s not an argument against Fed independence. If Obama had good judgment on monetary policy, then he would not have appointed a bunch of Fed officials who adopted an inappropriately tight monetary policy during the Great Recession. Nor would he have have told Christina Romer that the Fed was out of ammunition (i.e., that it had “shot its wad”).
As far as the advice from Trump, and from Reagan administration officials, in both cases the advice would have likely resulted in bad policies if adopted. We know that was the case regarding the advice from both the Johnson and Nixon administrations.
Regarding the “revelations” about Reagan, we should keep in mind that Reagan reappointed Volcker after the worst recession since the 1930s, caused by Volcker’s tight money policy. Also keep in mind that Reagan never criticized Volcker:
Top Reagan officials frequently criticized the Volcker Fed, but the president refrained. “Some of his staff would have liked him to come out fighting—criticizing the Federal Reserve when things got tough politically, and he just never did it,” said Mr. Volcker. Mr. Reagan reappointed Mr. Volcker in 1983 before selecting Alan Greenspan to replace him in 1987.
So it’s misleading the way some in the press are comparing Reagan to Trump.
Again, there are good arguments for reducing Fed independence. But these arguments are not to be found by examining the post-war record of American politics.
HT: TravisV
READER COMMENTS
Benjamin Cole
Oct 25 2018 at 3:30am
Yes, it is wrong to compare Reagan to Trump.
Trump, for example, never called for placing the Fed into the Treasury—where the Fed Chair would have to answer to the Treasury Secretary, meaning the President. Reagab did.
https://www.nytimes.com/1982/09/18/us/reagan-suggests-tighter-control-of-central-bank.html
Long knives out for the Fed! Those were the days.
I actually liked Reagan, and if he was deficient on many details (“Huh? We traded arms for hostages in Iran? When? You mean I signed and authorized it?”) and consulted with astrologers, Reagan had the saving grace of avoiding major wars (see LBJ and Bush jr. for an examples of how wars play out).
Alan Meltzer raked Reagan over the coals, as did many Cato types, for his protectionism, and some noted mush-wimp Carter actually did the heavy lifting on deregulation. Alfred Kahn and Co. No more pretty flight stewardesses thanks to Carter.
Meltzer termed Reagan’s monetary policies “incoherent.” The Reagan Plaza Accord drove the value of the dollar down in half against the yen, and also a large drop against the German mark. But Reagan spouted free trade and a strong dollar. Ran big federal deficits too. The guy could deliver a speech and sound like he meant it.
Still, Reagan was likable and did not seem to ever advocate hate (Bush Jr. was pretty good too, on this score). One might say less for Hillary Clinton or Trump.
After a while, hagiographers gain control of Presidential histories. Truman and Eisenhower have been lionized in recent decades, where once they were treated dismissively. I think they were great Presidents.
Reagan’s bust is also polished as the GOP has no recent greats otherwise. Nixon? Bush Sr. was afraid Geraldine Ferraro and a Globalist. Bush Jr. ended in the Great Recession and interminable wars. The Bush legacy looks smellier and smellier with the Khashoggi murder.
Reagan is the last man standing.
RPLong
Oct 25 2018 at 10:21am
America would not be “much better off” if Obama had pressured the Fed into a more pro-growth stance. Yglesias could argue that America would be better off if the Fed had taken a more pro-growth stance, but it’s hard to see why presidential pressure to do so would put America in a better position.
I know that sounds like I’m splitting hairs, but to me it strikes at the heart of the issue of independence. We presumably want a Fed that makes the right decisions for any reason at all, not one that specifically makes right decisions because it was pressured to do so by the President.
It’s antithetical to the American system of government, in my opinion, to place every major decision and rule within the Executive branch of government. What good can come from putting the national bank, the tax system, and the implementation of fiscal policy specifics all under the control of just one person?
Gordon
Oct 25 2018 at 5:07pm
Turkey is a recent example of the importance of central bank independence given the mess that Erdogan created by pressuring the central bank to maintain an easy monetary stance. And when Trump was campaigning he would complain bitterly about how the Fed had maintained an easy money policy to benefit Obama but in the same breath complain that the dollar was too high in value. Bernie displays the same level of incompetence as Trump. He complains that easy money caused the Great Recession. Yet he supports Fed Up which advocates an ultra easy monetary policy. While central banks do make mistakes and cause harm, Trump and Bernie demonstrate that letting politicians dictate monetary policy could cause far worse harm.
TravisV
Oct 25 2018 at 6:15pm
Prof. Sumner,
I think this analysis by Volcker is awful:
https://www.zerohedge.com/news/2018-10-24/former-fed-chair-slams-feds-false-precision-over-2-inflation-target
Nominal wages are sticky (employers avoid pay cuts). With 2% inflation, relatively struggling businesses can keep wages flat and keep everyone employed. With 0% inflation, that is not possible.
Does anyone have an advanced copy of Volcker’s book (coming October 30th)? Is there even a remote hint of Volcker understanding that that’s fundamental reason why monetary policy matters?
Thaomas
Oct 29 2018 at 6:59am
Three percent would probably be better to allow for impression in knowing just how sticky wages are. More important is making sure the target refers to the trend price level, that is, that it is truly symmetrical so that markets can be sure that any temporary downward/upward deviations in the inflation rate will be made up with higher/lower inflation in the future. Of course a 6% NDGPL target wold be even better.
Alex
Oct 26 2018 at 12:35pm
I feel the Fed often ducks behind their “independence” wall to avoid accountability.
In the context of monetary policy, what do you see as the relationship and difference between independence and accountability? Essentially, what are the ideal rules of engagement between a central bank and the executive/legislative branch?
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