Mr. Dooley told us that the Supreme Court watches the election returns. So also must the Chair of the Federal Reserve.

Economist’s View
and Hypothetical Bias call attention to the following remarks from Nobel laureate Joseph Stiglitz, who chaired the Council of Economic Advisors during part of the Clinton administration:

Macroeconomic policy can never be devoid of politics: it involves fundamental trade-offs… Unemployment harms workers, while the lower interest rates needed to generate more jobs may lead to higher inflation, which especially harms those with nominal assets whose value is eroded. Such fundamental issues cannot be relegated to technocrats, particularly when those technocrats place the interests of one segment of society above others.

Although the two parties may have differed in the importance they attached to inflation and unemployment in the 1960’s, I’m not sure that I would characterize the debate that way today. Which party today, pray tell, is the “pro-unemployment” party and which the “pro-inflation”? I would say that both Democrats and Republicans are committed to the goal of keeping the long-run inflation rate low, and most academic economists agree that such a policy is likely to be the most successful in helping maintain a low unemployment rate. We might differ in terms of how much we worry about a temporary rise in unemployment or inflation in any given situation, but surely these differences are ones that we can and should strive to discuss and resolve rationally on the basis of what the objective consequences of alternative policies would be rather than on the basis of ideology. For this reason, I would say that the most important attribute of a Federal Reserve Chair should be an excellent understanding of how the economy works rather than exhibiting partisan stripes of one flavor or other.

Stiglitz’s strongest statements address what he sees as Alan Greenspan’s role in the Bush tax cuts:

It is still not clear what led Greenspan to support the tax cut. Was it a massive economic misjudgment, or was he currying favor with the Bush administration? The most likely explanation is a combination of the two, for he and Bush were pursuing the same “starve the beast” political strategy.

The curious thing about this criticism of Greenspan is that fiscal policy (which I agree with Stiglitz is very much a political question) is the prerogative not of the Federal Reserve, but rather of Congress and the President. Stiglitz is taking the view that an important part of the job description for the Federal Reserve Chair is not just to make decisions that affect interest rates, inflation, and the banking system, but also to offer publicly stated opinions about what Congress and the President should be doing with taxes and government spending.

If the Fed Chair has no statutory role in tax and spending decisions, why should his or her opinions matter for anybody? Such influence as Fed Chair opining can exert is derived largely from the respect that the people who do control taxes and spending may have for the current occupant of the chair.

And such influence grew significantly under Greenspan, in no small part because he was very judicious about not trying to go too far or offend too many with any given announcement. The power of the Fed Chair to influence fiscal policy comes primarily from recognizing the boundaries within which one can maneuver and still maintain the respect of those who are actually calling the shots. Greenspan was quite skillful at that game.

Ben Bernanke

One of the things that impressed me during Bernanke’s brief term a CEA Chair was that he also has that ability to use words carefully and judiciously. Although his job required being a public advocate for the Bush economic policies, I found all his public statements well reasoned and moderate. I expect that as Fed Chair he could do a very good job at calling people’s attention to an issue without making unnecessary political enemies.

To be sure, our current fiscal policy has the potential to make it much more difficult for the Fed to carry out its job. Senator Chuck Schumer (D-NY) recently expressed his enthusiastic support for Bernanke on the expectation that Bernanke would speak out about the need to reduce deficits. Indeed I think Bernanke will do so. But one can speak about the need to reduce deficits (something on which I would like to see both parties come to an agreement) without taking a stand on exactly how that should be done (something on which feathers in the political fight will continue to fly). If Bernanke does speak up on deficits in this limited, bipartisan way, the influence of the Fed Chair’s tongue could grow even greater and the deficit problem might be raised front and center. Like Schumer, I would view such an outcome as a very good thing.