Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. A shorter version appeared in Project Syndicate on April 27th.
Of the two men whom Donald Trump had intended to nominate to empty seats on the Federal Reserve Board, Herman Cain has now withdrawn his name. This leaves the other one, Stephen Moore.
The Senate would have to decide whether to confirm Moore. He has some problems roughly analogous to Cain’s: he is considered to be under an ethical cloud and he often gets his economic facts wrong. Cynics might respond that he would thereby fit right in with the roster of Trump nominees throughout the government. But Trump’s earlier appointments to the Fed have been people of ability and integrity and have been doing a good job, Chair Jerome Powell in particular. Perhaps Trump did not start paying attention to Fed appointments until recently.
That Moore does not have an Economics PhD is not a reason to oppose him. Fed appointees have long included people with real experience in the world of business, for example. Powell doesn’t have one.
The worry, rather, is that Trump wants to put him on the Board as a loyalist crony who would do whatever is best for Trump, instead of what is best for the economy.
Moore has been pro-cyclical in his recommendations for monetary policy – that is, opposing stimulus when the economy needed it and favoring stimulus when the economy did not. First, when the Fed sought to boost the economy in response to the 2007-09 recession, Moore in 2009 warned of possible hyperinflation and continued in 2010 to warn of the danger of rising inflation. Needless to say, the inflation never materialized.
As employment rose steadily over the subsequent eight years, one might expect a rational observer’s fears of economic overheating to have increased. The unemployment rate is now below 4 %. Yet Moore switched his assessment and started attacking the Fed for excessively high interest rates. He recently wrote an op-ed called “The Fed is a threat to growth” [WSJ, March 13, 2018]. In December, he even suggested that Fed Chair Jerome Powell should be fired for raising interest rates.
If the Fed had followed Moore’s advice, it would have tightened monetary policy in 2010, when unemployment was 9 per cent, prolonging the great recession, but loosened monetary policy in 2018, with unemployment below 4 per cent. That cycle of policy would have destabilized the economy.
One is prompted to ask Moore if he turns on the air-conditioning at home in winter and the heat in summer. Is he so incompetent that he always gets things precisely wrong, as some have claimed? Presumably, he does not deliberately make his recommendations pro-cyclical. The most logical explanation of the difference is that he switched to urging monetary stimulus when Donald Trump took office. (Trump himself made the same switch in the direction of his attacks on the Fed, from 2011, for example, to 2018.)
It has been hard to miss the swing from Republican agitation for tighter monetary policy a few years ago to their now agitating for easier monetary policy. It fits into a larger pattern of pro-cyclical positions among leading Republicans, not just in monetary policy, but also fiscal and regulatory policy.
Some media coverage, however, treats this swing as a new thing, going against decades of conservatives’ dedication to monetary discipline. The perception that Republicans have been inflation-fighters is longstanding and widespread. But far from being a new thing, pressure from Republicans on the Fed to ease monetary policy whenever they are in the White House is a pattern that goes back half a century.
Past Republican presidents and the Fed
Republican President Nixon successfully pushed Fed Chairman Arthur Burns into an excessively easy monetary policy in the early 1970s — leading to high inflation which the White House tried to suppress with wage-price controls. Nixon also broke the link with gold in 1971 and devalued the dollar, ending the Bretton Woods era of monetary stability.
Republican Presidents Ronald Reagan and George H.W. Bush both tried aggressively to push Fed Chairmen Paul Volcker and Alan Greenspan into easier monetary policy, especially in election years. This is documented in Bob Woodward’s 2000 book Maestro. (Some in the Reagan Administration blamed Volcker’s tight monetary policy for the incomplete success of their 1981 supply-side revolution.) Reagan made four appointments to the Fed Board in the mid-1980s with the goal of tipping the balance toward easier money. The culmination came in the form of a short-lived February 1986 “palace coup” in which the Reagan appointees outvoted Chairman Volcker in an attempt to cut the discount rate [page 328 in Frankel, 1994].
The White House succeeded in making life unpleasant enough for inflation-slayer Volcker that he eventually declined to be reappointed, prompting Treasury Secretary James Baker to exult “We got the son of a bitch!” (page 24 in the Woodward book). [Baker is also the man credited with the Plaza Accord and the associated 50 % depreciation of the dollar from 1985 to 1987, which was eminently defensible policy, but not consistent with a hard-money philosophy.]
Volcker’s successor was Alan Greenspan. George H.W. Bush complained that Greenspan failed to ease monetary policy sufficiently in 1990-91 and blamed him for costing him re-election in 1992 (page 44).
Have the Democrats done it too?
Surely Republicans are not alone in wanting lower interest rates when they are in the White House? Surely “everybody does it.” Actually, no. Each of the three Democrats to serve as president in the last 50 years refrained from pushing the Fed to ease monetary policy. Jimmy Carter is the one who originally appointed Volcker as Fed Chairman in 1979, with a mandate to conquer inflation even at the cost of recession and reduced chances of re-election in 1980. The administrations of Bill Clinton and Barack Obama, for their parts, scrupulously abstained from commenting on US monetary policy at all, reinforcing the norm of Fed independence.
The Gold Standard versus a Commodity Standard
A century ago, the gold standard was considered a guarantor of monetary stability. That golden era is long-gone, if it every really existed at all.
Moore (like Cain) has said several times that he favors a return to a gold standard. In true Trumpian fashion, he recently denied having said it, despite the clear video evidence. In any case, he now says he favors having monetary policy focus on a basket of commodities, not just gold alone. This has brought him some ridicule. It is true, however, that a price index based on a variety of commodities would attenuate the volatility of the gold market. There was a time, in the 1930s after FDR took the US off of gold, when leading economists Benjamin Graham and John Maynard Keynes weighed the advantages of a hypothetical commodity basket standard.
In the case of a country that specializes in exports of mineral or other commodities, one can make an argument for targeting an index of those export commodity prices, as an alternative to the option of targeting the CPI. Proposing a commodity price target for the United States, would be foolish. But commodity prices are sensitive to real interest rates, and so one could make a case for including them alongside stock prices and the exchange rate in a financial conditions index. Real commodity price indices correctly reflect that US monetary policy began tightening in 2013-14, while still remaining loose by historical standards.
In the late 1970s, the supply siders who hitched themselves to Ronald Reagan’s 1980 candidacy famously campaigned for large tax cuts (which, they said, would pay for themselves). But they also tended to have a particular view on monetary policy: that the US should consider returning to the gold standard. The movement achieved the creation of a high-level official Gold Commission, but lost some momentum after it submitted its report in 1982.
In the 1980s, supply siders like Congressman Jack Kemp continued to campaign for a return to the gold standard, arguing that this would allow an easier monetary policy, which they thought was the only thing holding back the success of the supply-side strategy. (The price of gold was declining in 1981-1984, coming off a record high in 1980. Thus, it was a time when stabilizing the price of gold might indeed have implied an easier monetary policy.) It was noted then, as now, that to have a small-government populist arguing in favor of the gold standard stood on its head the history of American populism. That history was memorably represented by William Jennings Bryan’s campaign for the presidency during the deflationary 1890s, on a platform declaring that farmers and workers would refuse to be “crucified on a cross of gold.”
On this, Bryan was ahead of his time. The crude handcuffs of a standard based on gold or other mineral commodities may have played a useful role in preventing chronic inflation in the 19th century. But that era is no more. The Fed in recent years has shown that it can do better on its own, with competent appointees working under the protection of institutional independence. The Senate should think about that, if and when it is called upon to vote on Stephen Moore’s confirmation.
This post written by Jeffrey Frankel.