Don't appoint a bunch of business people to the Fed
By Scott Sumner
President Donald Trump will select three members of the Federal Reserve board during his term in office, including a replacement chair for Janet Yellen when her appointment expires early next year. He should seize the chance to refresh the Fed with faces from the business community, adding executives to the roster of PhD economists who currently run monetary policy in most of the world.
If we are going to look beyond PhD economists then why not consider plumbers or hair stylists? What sort of knowledge do business executives bring to the table?
The Fed appointments come at a key juncture in U.S. economic policy, one that makes business knowhow an even more valuable commodity for a rate-setter than usual. Trump’s fiscal policies will set a new backdrop for the monetary policy environment, given his intention to cut personal and business tax rates and boost investment in the nation’s infrastructure.
So appointing executives to the Fed who’ve had to take fiscal and monetary policy into account when making decisions on where and when to build new factories or make other capital expenditure decisions makes sense.
Hair stylists must take court decisions on occupational licensing into account when setting up a business, but does that mean you want to put a hair stylist on the Supreme Court? I have an even better idea, why not have hugely important monetary policy decisions made by people who are experts on monetary policy?
It would be interesting to ask a group of business people exactly how they “take monetary policy into account”. I wonder how many would (wrongly) assume that the question referred to “taking interest rates into account”, instead of actual monetary policy?
It’s little wonder that in this populist age central bank independence is under attack. As Bloomberg News reported on Monday, the rise of populism is putting pressure on central banks as “institutions stuffed with unelected technocrats wielding the power to affect the economic fate of millions.” Leavening the boards of policy makers with executives who’ve made hiring and firing decisions and have helped build companies would be a way to address the perception that decisions about borrowing costs are made in ivory towers by economists who’ve all read the same textbooks but don’t inhabit the same world as the people they’re supposed to serve.
So are we now to believe that “populism” in the 21st century means turning the government over to business executives, instead of union leaders, teachers, nurses and electricians? And this is because people like Bill Gates are more in tune with the lives of ordinary Americans than economics PhDs making $200,000/year? What relevant information about “real people” do economists lack? Do we not know that real people don’t like unemployment? Do we not know that real people don’t like high inflation? Do we not know that real people who borrow money like low interest rates and real people who save money like high interest rates? I’m genuinely curious—what is it about real people that we don’t know?
The article also points out that the Fed was dominated by non-economists from 1910 to 1950. (Put aside the fact that the Fed did not exist in 1910.) How’d the Fed do during that period?
The average inflation rate isn’t all that bad, but look at the volatility. There are three years where prices fell at roughly 10%, and 6 years where we had double-digit inflation. All in a 37-year span of time. In the following 66 years we’ve only had 4 examples of double-digit inflation, and the worst deflation was 0.4%. Monetary policy is especially harmful when it is highly unstable, and (other than 1923-29) this was never truer than during 1913-50. (You’d get similar results using NGDP growth rates.)
Readers of this blog know that I’m not a fan of technocratic experts managing the economy. I’d prefer a rules-based monetary regime when the market determined the money supply and interest rates. But as long as we have discretionary monetary policy, let’s have it run by people who are experts. Not necessarily PhD economists (Volcker had a masters in economics), but certainly people who can understand the research papers prepared by the Fed’s staff. Here’s one simple example. Ask Janet Yellen and the typical business executive why the CPI was so unstable between 1913 and 1950 (or during the Great Inflation for that matter.) Compare the answers.
Here’s an analogy. I hope to see the day where commercial airplanes are run by automatic pilots. But as long as we are using human pilots, I’d prefer they be trained jet pilots, not business executives trying out a new hobby.