Does criticizing the Fed compromise their independence?

August 28th, 2015 at 10:49 am

UPDATED again: Lane gets last word.

UPDATED with Lane response and my response to him.

I’m in the midst of a little Twitter feud with Chuck Lane from the WaPo and James Sherk from Heritage, coming off of the two pieces I wrote about the Fed Up campaign and their field trip to Jackson Hole. I’ve invited them to debate me here.

I’ll start:

Both Lane and Sherk appear to object the pressure by Fed Up to keep rates low on behalf of struggling workers, especially given the absence of inflationary pressures (their “craze to raise“).

Where we agree is that the Fed’s independence is, of course, a critical attribute.

Where we strongly disagree is that this in turn means that a) they should be shielded from outside scrutiny and criticism, or b) that they somehow already are shielded, and the Fed Up shouldn’t try to break the pristine shell within which the Fed exists.

Starting with b, the Fed faces relentless outside pressures from “hard money” types, from conservatives running for president, to financial news outlets, conservative think tankers, and editorialists at the WSJ.

James Sherk’s tweet—“maybe Congress should just vote on interest rates?”–is particularly notable in this regard. First, it’s a huge and silly jump from “it’s legit to critique the Fed” to “Congress should set rates.”* Second, his employer, the Heritage Foundation, has a ton of Fed critiques on their website, including this one, which argues that “Congress can improve economic outcomes by requiring the Fed to implement rules-based monetary policy.”

Chuck Lane: Read any newspaper, any day, including your own, and you will see tons of voices trying to push the Fed this way or that. And yet, when a group of low-wage workers undertake to do–a group that is conspicuously missing in these debates–you’re all “everybody stop bothering the Fed–you’ll compromise their independence.”

To be fair, you did mention the Summers critique–again, in your paper!–and Larry is…um…no low-wage worker. But his argument was trenchant and nuanced, far from just a knee-jerk reaction to the China-markets whiplash.

If anything, Larry’s argument dramatically underscores my point: we should applaud our top economists weighing in on such important issues as the Fed’s macromanagement of the economy. It’s far too important to the fates of working people–and not just here but around the globe–to watch from the sidelines.

*Reminds me of a similar hard-right argument: Oh, you like the minimum wage? Why not make it $1,000 an hour…ha, gottcha!

Chuck Lane responds:

Jared, obviously I don’t believe the Fed should be beyond scrutiny or criticism, and I never implied differently.The specific point you made, that the Fed should choose a meeting place that FACILITATES exposure to public criticism (of a particularly populistic and broad-brush sort), is what I was responding to, because of its pernicious slippery-slope implications. What I do believe is that central bank independence is an absolutely precious public good, the loss of which would be devastating to the economy well beyond the transitory effects of this or that interest rate decision. I do not believe the Fed is, in fact, shielded from pressure — the latest market panic being only the most obvious form. What I do strongly believe, however, is that we should all strive to insulate it from pressure as much as possible, and to channel outside pressure into regular, accountable, institutional forms (such as congressional oversight under Humphrey-Hawkins bill) as opposed to panicky traders or people marching with placards. Incidentally, you portray Fed Up as a grass-roots organization of “low-wage workers,” when in fact it’s an AFL-CIO sponsored “movement.” Perhaps there’s a more complex set of interests at work behind the scenes here: To wit: the various union pension funds have the same interest as Wall Street does in low interest rates, because they boost stock prices. Oh well, perhaps we should be celebrating the convergence of Main Street and Wall Street interests! There is a real parallel here with the courts and arguments over “legal realism.” In brief, legal realists say that judges are just politicians in robes, and there is no way to insulate the Supreme Court from political pressure, etc., so there’s no point pretending otherwise. To which the appropriate response is, the mere fact that we regularly fall short of an ideal is no reason to abandon, much less strive to incorporate it maximally in our institutions.

I respond to Chuck:

First, thanks for engaging. While you and I disagree about a lot, I (almost) always think you make some good points (e.g., I share your support for the EITC).

I thought your tweets quite clearly did imply that scrutiny by Fed Up and the critique from Summers were untoward, but maybe that’s a Twitter-doesn’t-do-nuance problem.

Couldn’t agree more with you on Fed independence–it is, as you nicely put it, a precious public good.

On the other hand, I disagree with the idea that we should “strive to insulate it from pressure.” One, I believe that outside critiques of important institutions it is not just characteristic of a democracy, but an essential democratic function–another precious public good. In the world you’re envisioning, it would be wrong to protest in front of the Supreme Court, no? That seems fundamentally at odds with not just free speech, but the responsibility of citizens to weigh in on critical social and economic issues that mean a lot to them. You and I may not like what they say all the time, but I’m glad to see them out there.

Two, there’s a huge free-rider problem here, and it’s one I believe Fed Up is trying to solve. Suppose we agree that we shouldn’t criticize institutions whose independence we value, which in our discussion is the Fed and SCOTUS. Surely, insiders will do so. The Fed, in particular, is set up in such as way as to interact with banking and market interests. SCOTUS, by dint of its presidential appointees, is obviously hugely influenced by politics, a point presidential campaigns do not hesitate to remind their supporters. So unless the rest of us join in the pressure, we cede a field that by construction is already subject to outside influence.

Finally, I see the AFL listed as one of about twenty members of Fed-Up’s coalition. I don’t think that makes it an AFL-CIO “sponsored ‘movement.'”

And Chuck fires back:

Sorry to shock, but . . . yes, I do believe that neither the Fed nor the Supreme Court are majoritarian democratic institutions, nor should they be. The former is an agency delegated authority over the money supply on the basis of its economic expertise, and nothing, absolutely nothing, else. It’s legitimacy, such as it is, derives only from that quality, which its members uniquely possess (or claim to), and NOT from qualities such as empathy, hard-moneyism, or, I dunno, a full appreciation of animal rights, that all sorts of people possess. SCOTUS, meanwhile, is a court of law. Neither is well-suited, or legally authorized, to reflect “the will of the people.” For both, it is in fact sometimes crucial that they deny “the people” what they “want,” so as to achieve the purpose for which they have been established. Yes, politics influence the court, via the nomination process, and the Fed, via prescribed congressional oversight. This is perfectly consistent with my point about the necessity of channeling public pressure though institutions as opposed to what the French would call “extra-parliamentary” politics. And yes, I am uncomfortable with demonstrations outside the Supreme Court, at least for what they symbolize, not because I oppose free speech, but because the function of a judge (or justice) is to respond to formal legal arguments presented under the controlled conditions of a legal process, not chants by crowds. Picket Congress. Petition SCOTUS for certiorari.

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9 comments in reply to "Does criticizing the Fed compromise their independence?"

  1. Chuck Lane says:

    Jared, obviously I don’t believe the Fed should be beyond scrutiny or criticism, and I never implied differently.The specific point you made, that the Fed should choose a meeting place that FACILITATES exposure to public criticism (of a particularly populistic and broad-brush sort), is what I was responding to, because of its pernicious slippery-slope implications. What I do believe is that central bank independence is an absolutely precious public good, the loss of which would be devastating to the economy well beyond the transitory effects of this or that interest rate decision. I do not believe the Fed is, in fact, shielded from pressure — the latest market panic being only the most obvious form. What I do strongly believe, however, is that we should all strive to insulate it from pressure as much as possible, and to channel outside pressure into regular, accountable, institutional forms (such as congressional oversight under Humphrey-Hawkins bill) as opposed to panicky traders or people marching with placards. Incidentally, you portray Fed Up as a grass-roots organization of “low-wage workers,” when in fact it’s an AFL-CIO sponsored “movement.” Perhaps there’s a more complex set of interests at work behind the scenes here: To wit: the various union pension funds have the same interest as Wall Street does in low interest rates, because they boost stock prices. Oh well, perhaps we should be celebrating the convergence of Main Street and Wall Street interests! There is a real parallel here with the courts and arguments over “legal realism.” In brief, legal realists say that judges are just politicians in robes, and there is no way to insulate the Supreme Court from political pressure, etc., so there’s no point pretending otherwise. To which the appropriate response is, the mere fact that we regularly fall short of an ideal is no reason to abandon, much less strive to incorporate it maximally in our institutions. Bye!


  2. Peter K. says:

    Exactly. As I see it the Fed is under enormous pressure from the right to stop helping the economy. I believe Bernanke tapered QE prematurely because of that pressure. I believe that Yellen is looking to leave ZIRP under that pressure. They looked at the data to consider the risks of whether the economy could handle ending QE or ZIRP without disastrous consequences, not that it was the right thing to do.

    The right thing to do would have been to close the output gap and achieve real full employment as quickly as possible. This would have allowed them to normalize interest rates more quickly. An economy at full strength would help close the budget deficit more quickly if that’s your priority, with higher tax revenues and less safety net payouts. Most of all an economy with real full employment and shared prosperity should be the Fed’s goal. The failure of the two tweeters to see all of this seems to indicate to me they are wearing ideological blinders.


  3. Chuck Lane says:

    Sorry to shock, but . . . yes, I do believe that neither the Fed nor the Supreme Court are majoritarian democratic institutions, nor should they be. The former is an agency delegated authority over the money supply on the basis of its economic expertise, and nothing, absolutely nothing, else. It’s legitimacy, such as it is, derives only from that quality, which its members uniquely possess (or claim to), and NOT from qualities such as empathy, hard-moneyism, or, I dunno, a full appreciation of animal rights, that all sorts of people possess. SCOTUS, meanwhile, is a court of law. Neither is well-suited, or legally authorized, to reflect “the will of the people.” For both, it is in fact sometimes crucial that they deny “the people” what they “want,” so as to achieve the purpose for which they have been established. Yes, politics influence the court, via the nomination process, and the Fed, via prescribed congressional oversight. This is perfectly consistent with my point about the necessity of channeling public pressure though institutions as opposed to what the French would call “extra-parliamentary” politics. And yes, I am uncomfortable with demonstrations outside the Supreme Court, at least for what they symbolize, not because I oppose free speech, but because the function of a judge (or justice) is to respond to formal legal arguments presented under the controlled conditions of a legal process, not chants by crowds. Picket Congress. Petition SCOTUS for certiorari.


  4. PattyP says:

    So maybe we should shield the Fed from pressure such as WSJ editorials by preventing them from reading the newspaper? Not allow Fed computers to access the Heritage Foundation website?

    Funny how we only need to shield them from pressure that’s coming from the “unwashed masses” – you know, the wrong KIND of pressure.


  5. D. C. Sessions says:

    Nothing — absolutely nothing, or at least short of cloistering — is going to insulate the Fed (or the Court) from ex parte influence. Which, let’s be serious, is going to be heavily filtered and consequently systematically biased.

    A for ex parte influences on the Supreme Court vs. “formal legal arguments presented under the controlled conditions of a legal process,” I present for your consideration Justice Scalia’s recent dissents composed of ad hominem attacks on the Chief Justice. As for the Congressional review process, please recall Chief Justice Roberts’ “balls and strikes” testimony in the light of Shelby County.


  6. Peter K. says:

    Today’s New York Times has an op-ed pressuring the Fed from the right by William Cohan.

    “For both, it is in fact sometimes crucial that they deny “the people” what they “want,” so as to achieve the purpose for which they have been established.”

    What the people – or political donors to the President and Senate – want is low inflation to protect their debt contracts and value of their money. This priority – low inflation – has damaged the productive capacity of the economy and hurt society. It has caused wage stagnation and increasing inequality.

    The Supreme Court has been sheltered and independent and what has it given us? Dred Scott? Bush v. Gore? Citizens United?


  7. Eric says:

    What an annoying guy to argue with. Who ever said the fed or Supreme Court were “majoritarian democratic institutions”?


  8. PJR says:

    Lane is wrong. It’s important for the Fed (and SCOTUS) to hear different views, even if these views must be screamed from the rooftops. Lane supposes that this is “political pressure” whereas views expressed in the back room (or by editorial writers?) are somehow different. Members of the Fed (and SCOTUS) have political opinions that affect their decisions, so using speech to affect these opinions is entirely appropriate. “Political pressure” is quite different–it is the use of carrots and sticks to alter (or buttress) views and/or decisions. This happens, too, usually subtly, but I see no evidence that Fed Up is engaged in such behavior.


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