Judy Shelton for Fed?
By David Henderson
My friend and sometime co-author Alexander William Salter has written an excellent piece in National Review in which he makes the case for confirming Judy Shelton as a member of the Federal Reserve Board of Governors. It’s “Confirm Judy Shelton to the Fed Board of Governors,” National Review, November 16, 2020.
There are three strikes against Shelton in the eyes of her detractors. The first is her fond view of the gold standard, a decidedly gauche position among monetary economists. The second is her academic background: Her Ph.D. is in business administration, not economics, and was awarded by a non-elite university besides. The third is her perceived partisanship, which Shelton skeptics contend would reduce the political independence of the Fed.
Alex answers each in turn. You can go to his article and see if you’re convinced. I am.
One highlight from his piece is his defense of the classical gold standard, not that Shelton would have much chance to move us toward it:
And let’s be clear: It does work just fine. Specifically, the “classical” gold standard, which prevailed from 1879 to 1914, in many respects outperformed the system we have now. (It’s important to specify which gold standard we mean. The “gold-exchange” standard that prevailed between World Wars I and II was awful, largely because central banks mucked it up.) In an important paper comparing the pre- and post-Fed periods, George Selgin, William Lastrapes, and Lawrence White found that “the Fed’s full history . . . has been characterized by more rather than fewer symptoms of monetary and macroeconomic instability than the decades leading to the Fed’s establishment.” In a subsequent study, Thomas Hogan found that GDP growth was better in the pre-Fed period, while inflation and inflation volatility (a key measure of purchasing power predictability) were worse.
When I wrote about Shelton in July, I leaned in favor but didn’t know enough to take a position. But even without reading Alex’s piece, I had come in the last few months to the view that Shelton should be confirmed. And my reason doesn’t have to do with monetary policy but with industrial policy. If you judge the Fed solely on the basis of monetary policy, you’re leaving out a lot of what they do. The Federal Reserve is now a practitioner of industrial policy, picking winners and losers.
I wrote at the end of July:
Moreover, the Federal Reserve, which took on new powers during the financial crisis of 2007-2009, is going further down that path. In a March 23 press release the Fed states, “The Federal Reserve is committed to using its full range of tools to support households, businesses, and the U.S. economy overall in this challenging time.” The release then goes on to list various assets that the Fed will buy, including corporate bonds and municipal government bonds. We used to think of the Fed as the agency whose main purpose was to keep inflation low. That’s so 20th century. The Fed is now essentially the agency that gets to decide which investments are important; it is conducting an industrial policy in all but name.
I’m fairly confident that Shelton is sufficiently against central planning to oppose these Fed powers. And certainly I think she would favor them less than almost all, or maybe all, the other Fed governors.