Should the Fed be led by experts?
Commenters often express skepticism that monetary policy should be conducted by experts. They point to the fact that expert policymakers have made a number of errors over the long history of the Fed, and suggest that we might be better off giving non-experts a chance.
But which non-experts? Should we turn the Fed over to farmworkers who pick tomatoes? How about people that work in nail salons? The world of non-experts is vast, and it’s not clear which non-experts would be best. How about plumbers?
At this point people might respond that we should try appointing really smart non-experts. But who would they be? Perhaps brain surgeons or particle physicists?
If you press hard enough, I think the people who are skeptical of elitists running the Fed often have a very specific set of non-experts in mind—people in business and finance. People with “real world” experience. Unfortunately, there is no real world experience relevant to monetary policy.
[Coincidentally, many of the commenters who read my two blogs work in business and finance. So perhaps when they are thinking of non-experts to lead the Fed, they are thinking of the person they see when looking in the mirror.]
Here’s the problem with this view. It turns out that running a bank gives you no more expertise to run monetary policy than does running a nail salon. That’s because monetary policy is very different from banking, indeed they are essentially unrelated fields.
At this point I probably sound like snob, suggesting that only experts like me should be able to run monetary policy. That’s a bit misleading for two reasons. First, I would turn down any offer to join the Federal Reserve Board because I’m not qualified. I believe that I am qualified to vote on FOMC monetary policy decisions, but I am not qualified to do all of the other duties that have been (unwisely) given to the Fed, such as bank regulation. So I am not arguing that the Fed should hire people like me.
There is another reason why I am less elitist than might appear at first glance. While I want the Fed to hire the best experts, unlike many other economists I don’t care at all about credentials. As far as I am concerned one can be a self-taught expert. I suspect that someone like Matt Yglesias would do a decent job. Thus while I would not argue that Powell is the absolute top expert in monetary policy, he does have a lot of expertise in the field, despite lacking a PhD in economics. But that expertise did not come from working in the financial industry, rather much of his expertise was acquired at the Fed.
Some people argue that Powell shows that expertise is not essential, because he did a better job promoting recovery than Bernanke or Yellen, who both have had much more formal training in monetary economics. But when Powell first joined the Fed, his views were if anything slightly more hawkish than those of Yellen, at a time when a more dovish policy would have been appropriate. Powell benefited from what he learned over the 2010s, and also from the lessons other top Fed officials learned from what (in retrospect) was inappropriately timid monetary stimulus during the 2010s.
Recently, the Fed overshot its implicit target for aggregate demand, a mistake that Bernanke or Yellen would have been slightly less likely to make. Thus while in an overall sense Powell has done a very good job, in some ways better than his two predecessors, a closer look at his record does not provide much support for the claim that monetary policy is best left to the non-exports. He’s gotten better as he’s acquired more expertise.
While some of my better non-economist commenters are knowledgeable enough to do a reasonably good job managing monetary policy, I think they are often fooled into overestimating how easy the job is. At any point in time, policy might be too easy or too tight. If you guessed one way and the Fed went the other, and then you turned out to be right, then it would be easy to conclude that you were smarter than the Fed. But even an 8-year old child would often be correct when asked to guess whether policy was too easy or too tight.
True expertise in monetary policy requires much more than being lucky in your intuition about whether policy is too easy or tight at the moment. For instance, suppose I asked you to explain when the concept of money neutrality is appropriate and when it is not. Then I asked you when the concept of monetary superneutrality is appropriate and when it is not. Can you answer both questions off the top of your head? If not, then there are plenty of other people (mostly economists) who are more capable of running monetary policy than you are. These concepts are often not important for day-to-day policy. But at the times they are, such as during the late 1960s, you sure as heck need to understand them.
I want experts piloting the airliners I fly in. I want experts doing brain surgery if I have a tumor. And I want experts running monetary policy.
But I’d also like to shift to a monetary regime where expertise is less important, such as my “guardrails” approach. If we get there in my lifetime (unlikely), then I’ll be more open to hiring a farmworker to run the Fed.
PS. Most recent presidents have made lots of mediocre appointments to the Fed, and a few excellent choices. Given the importance of monetary policy, we really ought to be appointing no one but the most highly qualified. Pay them whatever it takes.