Filenews 16 August 2024 - by Jonathan Levin
Donald Trump appears to be absolutely serious about his plan to give presidents a say in monetary policy, a proposal that would undermine the independence of the Federal Reserve for decades, disrupt markets and damage the country's ability to control inflation in the long run. It is one of the worst economic proposals ever put forward by a major party presidential candidate.
The idea was first discussed in a disturbing Wall Street Journal report in April, which cited anonymous sources and about which my Bloomberg colleague Tyler Cowen wrote at the time. Then, last week, the former president laid out his feelings on the issue at a news conference from Mar-a-Lago, and his running mate J.D. Vance defended the proposal in an interview aired Sunday on CNN. Until now, anyone who tends to downplay the threat should think again.
Decades of research and experience have shown that independent central banks without political interference yield the best results. In the absence of such rules, the temptation becomes too great for sitting politicians to encourage easy politics in election periods. Indeed, political factors essentially dictated policy for decades until Fed leadership won some guarantees of independence in the years just after World War II. Since then, there has been the golden age of Fed independence under Bill Clinton until today, when presidents other than Trump refused to press the Fed on its interest rate policy. Unsurprisingly, this era also coincided with a period of low inflation and the record long economic growth that ended with the pandemic.
In 2018 and 2019, Trump torpedoed the modern treaty under which presidents remain silent on monetary policy. He directly attacked Fed Chair Jerome Powell — his own pick for the job — and openly pushed for lower interest rates in a series of high-profile interviews and Twitter posts. Now, he wants to go even further and reopen the debate about the White House's influence on the Fed's rate-setting committee. Here's how the former president put it: I think the president should have at least a say there. Yes, I feel that strongly. I think in my case I've made a lot of money, I've been very successful, and I think I have a better instinct than, in many cases, the people who are at the Federal Reserve or the president.
In other words, Trump believes his experience as a reality TV star and casino and real estate investor — with many related bankruptcies — has given him a better sense of monetary policy than members of the Federal Open Market Committee on Interest Rate Regulation and hundreds of PhD economists. Lest anyone think that Trump is just throwing out ideas to see what resonates with the public, here's what his prospective aide, Vance, told CNN: Whether the country is going to war, what our interest rates are — these are important questions for which American democracy should have important answers. And I think all President Trump is saying is that, look, it's kind of weird that you have so many bureaucrats making so many important decisions. If the American people don't like our interest rate policy, they should elect someone else to change that policy. Nothing should be above democratic debate in this country when it comes to the big issues facing the US.
This is the wrong way of thinking. The American people should not have to choose their interest rate policy alone, any more than they should act as their own doctor, represent themselves in the courts, or build their own bridges. There are some things that are best left to the professionals, and history has shown that this also applies to interest rate policy.
It is true, of course, that democracy should have a say in which professionals have the power to lever the Fed, the most important institution in the global economy, and indeed this is already the case. Presidents appoint members to the Fed's Board of Governors for 14-year terms — a period intended in part to shield the board from the political cycle — and can also appoint the president and vice presidents for four-year terms. These professionals are responsible for setting monetary policy. In addition to Powell's nomination as speaker, two members of the seven-member board are Trump appointees. If you gave presidents more power over the Fed, that would be an unfair advantage for the president.
History is full of examples that show why any further interference by politicians is a bad idea. Richard Nixon appointed Arthur Burns as president in 1970 with a tacit agreement — which Nixon even joked about during Burns' inauguration ceremony — that the president's former economic adviser would secure lower interest rates. And Nixon regularly spoke with the Fed chief in an overly comfortable relationship blamed in part for the most inflationary decade in modern American history — a mess that was only corrected when Paul Volcker became president and effectively drove the country into recession to restore a stable price environment. After that, it took decades of work to build the Fed's credibility.
What worries me most is that I suspect the Trump-Vance project is probably good rhetoric but awful politics. Republicans give miserable grades to the Fed and many other agencies. Understandably, every American trying to buy a house or car probably hates the fact that interest rates are at a two-decade high. In fact, high interest rates are sometimes a painful "medicine" meant to cure the "disease" of inflation, but the offsets can be difficult to explain to a voting public struggling to make a living.
Of course, many of us are critical of individual Fed decisions, and I've personally documented complaints in recent weeks about how policymakers have been slow to cut rates. These policymakers are far from perfect. But post-coronavirus inflation has been a global phenomenon, and Fed officials have so far done heroic work to bring it back without causing a recession.
Given the circumstances, Powell's Fed was very good at its job. Of course, it is unlikely to have been as successful as it has been had it not been for the independence of the Fed and the cautious inflation expectations that accompany it. If Trump's idea goes through, it could undermine all of that and also make future presidential elections less fair.
Performance – Editing: Stathis Ketitzian
