Matt Yglesias

Federal Reserve Independence and Democracy

I can imagine arguments against institutional independence for central banks, but I think the whole idea that Fed independence is “undemocratic” in a problematic way is, itself, pretty problematic. After all, Ben Bernanke’s not a dictator. He was appointed by the President of the United States and confirmed by the United States Senate, just like a lot of other officials. It’s true that the president can’t just fire him unilaterally. But it’s not clear that George W. Bush’s ability to fire US Attorneys for failing to pervert the criminal justice system for partisan ends served the cause of democracy. Nor do I think it makes much sense to say that the United States is undemocratic for requiring the president to listen to the military advice of professional officers rather than political appointees.

Meanwhile, we have lots of countermajoritarian political institutions in the United States, ranging from the apportionment of the Senate to the filibuster to the workings of the committee system to the electoral college to bicameralism in our legislatures. But we’re still “a democracy” just like Canada and France and India and Japan are all democracies despite having very different political institutions. And given the rest of the political institutions in the United States, it’s not clear what alternative to independence would be more democratic.

We could just let the President set interest rates and conduct monetary policy, but that would be making Fed functions less responsive to congress than the current setup is. Or we could say that monetary policy actions require an act of congress. But congress is countermajoritarian itself and has an enormous status quo bias. Maybe we could have the Fed chair stand for election independently? But to make a long story short, I don’t really see a huge problem here in terms of democracy once you put the Fed in the context of the rest of the American institutional framework.

Dan Tarullo

It seems Barack Obama is poised to nominate Dan Tarullo for a seat on the Federal Reserve Board. In addition to being a law professor at Georgetown, Tarullo is a CAP senior fellow:

Professor Tarullo held several senior positions in the Clinton administration, ultimately as Assistant to the President for International Economic Policy, responsible for coordinating the international economic policy of the administration. He was a principal on both the National Economic Council and the National Security Council. Prior to his appointment to that position, he had been Deputy Assistant to the President for Economic Policy, with special responsibility for regulatory and international issues.

From 1993 until early 1996, he was Assistant Secretary of State for Economic and Business Affairs. In March 1995, President Clinton appointed Tarullo as his personal representative (”sherpa”) to the G-7/G-8 group of industrialized nations, with responsibility for coordinating U.S. positions for the annual Leaders Summits. He continued this assignment after he moved to the White House, participating in four summits.

Before joining the administration, Professor Tarullo practiced law in Washington and served as Chief Counsel for Employment Policy on the staff of Senator Edward M. Kennedy. Earlier in his career he worked in the Antitrust Division of the Justice Department, served as Special Assistant to the Undersecretary of Commerce, and taught at Harvard Law School.

You can read some of his CAP stuff on reforming the IMF and World Bank, or trade deals and labor rights, and the case for reviving the Doha round. Now as it happens none of that is especially relevant to his new job. But still, there it is.

UPDATE: This might be more relevant: Banking on Basel: The Future of International Financial Regulation.

Asset Prescience

Daniel Davies blogged way back in 2002 that the Fed’s most likely approach to boosting economic growth was to facilitate the creation of a housing price bubble:

Cleverer readers at this point will be formulating an objection. The objection goes along the lines of:

“Yeah, yeah, laughing boy, but what happens when the housing bubble bursts then?”

Which is a damn good question to ask, particularly since the official policy of the Federal Reserve appears to be “hmmm yeh, never thought of that, I suppose we’d be kind of fucked”. Looks like it falls to me to come to their aid, with a solution that smacks of genius.

For all the back-and-forth bluster about Fannie Mae, regulation, “Wall Street greed,” etc. there seems to me to have been remarkably little focus on policymakers decision-making with regard to this issue. One reason there hasn’t been a ton of focus on it is that a lot of smart, well-informed people saw this risk and thought the Fed was right to basically ignore it. But the very fact that the Fed had — or at least was widely thought to have had — good reasons to behave in this manner is all the more reason to shine some scrutiny. Since nobody ever says “my plan is to be corrupt and incompetent” there’s relatively little value in just saying over and over again that corrupt and inept public officials are undesirable. We do, by contrast, need to talk about how and why well-regarded public officials wound up making serious mistakes. There are, presumably, lessons to be learned here.

Government Good and Bad?

Reader J.F. has a question about my post on how not all government agencies are as bad as that one time the DMV really screwed up: “RE: AirForce, I agree with your broad point, but do you have any thoughts regarding the fact that the well run government agencies you mention are all military? Are civilian run agencies just never as good? And why is that? Further, should we ask the military to run our healthcare. I’m only half-kidding on that last one.”

First off, I would reject the premise. One of the examples I cited of an effective public institution is the Federal Reserve system. The very same conservatives who seem certain that the government would botch even the most minor regulatory tasks have pretty much no problem with the idea of the Fed setting interests rates that do an enormous amount to control the overall level of employment, GDP growth, and inflation in the country. And rightly so — the details of the Fed’s conduct over the past 20-30 years are certainly open to criticism, but they’ve definitely delivered shorter, shallower recessions than we had in the past and the very same Bush administration that put Michael Brown in charge of FEMA picked a new Fed chief whose decision-making regularly earns praise from Paul Krugman.

Beyond the Fed and the military there are lots of parts of the government that work quite well — we have bad schools and bad police departments in this country, but also good schools and good police departments. We fight forest fires with extraordinary skill and I’ve had great visits to any number of attractions run by the National Park Service.

And then, yes, there’s the military. But there’s no real mystery here as to why our very large military is also a reasonably high-performing government agency — it’s something our political leaders put a high priority on. This is similar to the Fed — political elites wouldn’t stand for staffing it with incompetents and know-nothings. Other agencies become patronage mills or suffer from funding shortfalls or deliberate sabotage. When the government is run by people who don’t want environmental regulations, civil rights law, or labor law to be enforced properly those things don’t happen. What’s more, a lot of the better public institutions — from the Fed to the Navy to state universities and so forth — are structured in special ways to try to insulate them from problematic forms of politicization.

This topic initially arose in the context of some snark about the evils of the government taking over the health care system, and my point wouldn’t be to say that government-run health care would necessarily be good but only that one could envision a wide range of outcomes. Were the government to start running American health care, it would be important to think about a lot of questions of institutional design to try to make sure that it ran health care well. In the real world, the government is already pretty heavily involved in the health care system in terms of regulating it and the main progressive legislative proposals all involve basically maintaining the current framework of a regulated-and-subsidized but privately owned-and-operated health care system so I’m not sure that this debate is all that relevant. In terms of the military running health care, though, the Veterans’ Administration provides excellent health care and I hear good things about the schools the DOD runs on military babes.