Everyone needs to be accountable
By Scott Sumner
All human institutions are fallible, and hence need to be accountable. That should be obvious, but when it comes to the Fed some people seem to think we just need to trust them. Allan Meltzer knows otherwise, and did a nice job explaining this to Congress (this quotation is from John Taylor’s blog):
Meltzer spent a lot of time explaining in simple terms the merits of the policy rules bill, especially in comparison with other reforms, including the Audit the Fed bill. It’s worth listening to. Here are some highlights:
In his opening, Meltzer said “We need change to improve the oversight that this Committee and the House Committee exercises over the Fed. You have the responsibility. Article I, Section 8 gives that to you. But you do not have the ability to exercise authority. You are busy people. You are involved in many issues. The Chairperson of the Fed is a person who has devoted his life to monetary policy. There is not any series of questions that you can ask on the fly that they are not going to be able to brush aside. That is why you need a rule. I agree with John Taylor about some of the reasons for the rule, but I believe one of the most important is that Congress has to fulfill its obligation to monitor the Fed, and it cannot do that now because the Chairman of the Fed can come in here, as Alan Greenspan has said on occasion, Paul Volcker has said on occasion, and they can tell you whatever it is they wish, and it is very hard for you to contradict them. So you need a rule which says, look, you said you were going to do this, and you have not done it. That requires an answer, and that I think is one of the most important reasons why we need some kind of a rule.”
Later in the hearing Senator Brown raised the issue of the audit the Fed bill, saying “Dr. Meltzer, be specific, if you would, about your thoughts about the Audit the Fed proposals,” and Meltzer answered: “I think you do not get what you want. Suppose you knew everything. Suppose you found out that the Fed chooses its policy using a ouija board. What would you be able to do with that? What you want to do is get something which permits you to see that the policies that are carried out, are carried for the benefit of the public….The information you want has to come from having something very deliberate that you know they are going to do and that they tell you they are going to do, and you are able to say, ‘You did not do it,’ or, ‘You did.'”
Meltzer later elaborated: “The problem with many of these proposals [release transcripts earlier, audit the Fed, etc.] is they don’t look at what would be the circumvention….What I think the Congress needs to do, it needs to face up to its responsibilities. Its responsibility is to be able to say to the Fed: ‘You told us you were going to do this, and you didn’t do it. Why?’ That’s what the rule gives you. That’s more important….You have to get a discipline in the Fed to tell you what it is going to do and then do it.” At this point Senator Shelby interrupted: “That is more important, isn’t it?” and Meltzer answered “That is more important than any other single thing you can do. You do not have the ability now to monitor them.”
Speaking of John Taylor, back in 1993 he explained that a rule did not have to be completely rigid, for instance you could instruct the Fed to target nominal GDP:
Moreover, in my view, policy rule need not be a mechanical formula, but here there is more disagreement among economists. A policy rule can be implemented and operated more informally by policymakers recognize the general instrument responses that underlie the policy rule, but who also recognize that operating the rule requires judgment and cannot be done by a computer. This broadens the definition of a policy rule significantly and permits the consideration of issues that would be excluded under the narrower definition. By this definition, a policy rule would include a nominal income rule in which the central bank takes actions to keep nominal income on target, but it would not include your discretionary policy.
These two quotes get to the heart of the problem. Right now Congress has no ability to hold the Fed accountable. Most Congressmen don’t even know that the Fed is trying to keep the growth path of aggregate demand fairly stable. Most don’t know that a steep fall in AD is a monetary policy failure. Most don’t know that 2008-09 saw the steepest fall in AD since the 1930s. So they have no way to hold the Fed accountable.
Congressmen need to be able to say, “You guys at the Fed are supposed to deliver this price level path, or this NGDP path, and you are not doing so. Why not?” That’s how you hold institutions accountable. That doesn’t mean Congress must pick the target. One option is for Congress to set a broad mandate, such as stable prices and high employment, and instruct the Fed to set a clearly identifiable path of some sort of macroeconomic aggregate that is consistent with that mandate, against which their policy could be judged.
Right now it doesn’t seem like the Fed is even holding itself accountable. In the minutes for 2009 I’m not seeing Fed officials saying, “we should have done X, and we failed.” There’s no sense that they are actually responsible for the path of AD. And yet when things go well (say in the period of stable and low inflation prior to the Great Recession) the Fed takes credit for that success. They can’t have it both ways, but right now they do have it both ways. Opinion leaders like Robert Samuelson say that we should not be bashing the Fed. Here George Selgin pushes back, he understands that even the Fed must be held accountable:
Mr. Samuelson worries that Fed “bashing”–by which he seems to mean any criticism of the Fed that seeks to justify a reduction of its considerable power–“adds to uncertainty and subtracts from confidence” upon which economic growth depends. In truth, the Fed’s actions are themselves often unpredictable, and especially so when it comes to their influence on the long-run course of prices and spending. Were the Fed really a sort of Ambrose Light of financial markets, as Mr. Samuelson imagines it to be, Fed watching, instead of being a growth industry, would be about as useful–and as boring–as watching paint dry.
But the Fed needs more than mere watching. It needs scrutiny. It needs criticism. Above all, it needs to be reigned in–not for conservatives’ sake, but for everyone’s. Mr. Samuelson may not like it. But I, for one, intend to keep bashing away.
Surely the Fed must be trying to do SOMETHING. In that case the Fed needs to tell us what that something is, and how we can judge what sort of success they’ve had. It’s that simple.
HT: Frank McCormick, Evan Soltas