At a time when many of our key institutions, especially government, are failing us, the Federal Reserve stands out as a highly functional establishment. Their insulation from overt political pressures helps a great deal, and while almost everyone, myself included, disagrees with some of their decisions, the central bank efficiently and effectively practices monetary policy in the interest of balancing their dual mandate of price stability and full employment.
But they’re far from perfect. Though the Yellen Fed has been tough on labor market slack, there’s a long-term bias towards worrying more about inflation than full employment, at great cost to less advantaged workers whose bargaining power is closely tied to the unemployment rate. The Fed particularly dropped the regulatory ball during the housing bubble (Alan Greenspan, Fed chair when the bubble inflated, believed markets would “self-correct”…whoops).
Moreover, there are governance, transparency, and representativeness issues that could be improved at the Fed, which is why I was happy to see the Fed Up coalition (more on them below) release a proposal by Dartmouth professor and former Fed economist Andy Levin to update some ways in which the Fed is run.
First, let me point out what’s not in Levin’s proposal: any outside intrusion into the Fed’s monetary policy decisions (i.e., into how they decide to set the interest rate they control and other methods they use to speed up or slow down economic activity).
You may well be thinking, “But that’s the most important thing the Fed does! If you’re not nudging them on that, then what’s the point?” But it is precisely there where Fed independence is so crucial.
I might like it if I was the one who got to push them towards up-weighting full employment at a time like the present, avoiding potentially damaging pre-emptive rate hikes. But believe me, there are a lot of powerful people who want to push them hard in the other direction. Just this morning, I read an interview with Republican Kevin Brady—chair of the powerful Ways and Means Committee in the House—wherein he argued that the Fed should drop their full employment mandate and just focus on holding down inflation.
Of course, they’ve been missing their inflation target on the downside for years, but there is and always has been a powerful and influential group of inflation hawks who are not exactly…um….data driven.
Which brings us to what Levin does propose. He argues that the Fed’s governance structure is outdated and “its transparency and accountability are severely deficient.” To address these problems, he proposes four changes, mostly focused on the 12 regional banks in the Federal Reserve system:
- The regional Federal Reserve Banks, which are now commercial institutions, should become public (as is the DC Fed).
- The public should help select regional Fed presidents through a transparent process.
- All Fed officials “should serve one non-renewable term of seven years.”
- “The Government Accountability Office should produce a regular annual review of all aspects of the Fed’s policies, procedures, management, and operations.”
Read the proposal, which clearly explains why these reforms are needed (though I’m less certain of #4), but the basic point, as Dean Baker gets into here, is that the above noted thumb-on-the-scale in favor of holding back inflation vs. squeezing out slack relates to the structure of the regional banks and how their presidents, who serve on the Fed board (and thus influence monetary policy), are elected. Greater public control of these banks, more democracy in how their presidents get elected, and term limits for Fed officials can boost accountability without compromising the Fed’s independence.
At one level, the problem Levin is trying to solve here is that while the Fed is somewhat insulated from outside pressures, they hear a lot more from banks than they do from low- and middle-wage workers. And yet, the economic fate of those workers is very much linked to the Fed’s actions.
I noted some hesitancy regarding Andy’s 4th point: annual reviews by the GAO. To me, this gets a little too close to Republican calls to audit the Fed. The DC Fed already has internal and external auditing processes in place and with one exception, they look to me to work well (though Levin, a Fed insider for years, knows a lot more about this than I do). The one exception is that, because the regional banks are privately owned, the Fed’s Inspector General’s ability to monitor their activities is limited. But Levin’s other reforms, which make the regional banks public entities, seem to me to address that shortcoming.
One final point. It is often viewed as verboten to say anything about the Fed in political contexts. To do so is considered by many as a slap at their independence.
To which I say, “that’s nuts.” They’re much too important to hive off from political discourse. For example, why is it OK for presidential candidates to give us a sense of what they’re looking for in a Supreme Court justice but not a Fed governor? The latter can affect the quality of your everyday life as much if not more than the former.
To his credit, Bernie Sanders has put forth a set of ideas for reforming Fed policy, some of which dovetail with Levin’s. Notably, the influential economist Larry Summers, who’s name often comes up when discussing Fed appointments, agreed with about 56 percent of Bernie’s reforms. It would be a very good thing to see what the other candidates have to say about all this.