A few years ago, Kate McKinnon had a pretty good sketch about Saturday Night Live called “What Still Works?” in which she “interviewed” a whole bunch of awful people – Marjorie Taylor Greene, a meme stock investor, etc. – to find out what, if anything, still works. At one point she spoke to Jack Dorsey (played by Mikey Day), then-CEO of Twitter:
Jack Dorsey: While we’re gathering opinions on what works, would you say my goatee works?
Kate McKinnon: It works when it comes to keeping me a lesbian.
Good sketch. And a good question too.
If I had to redesign the U.S. government from scratch, my hard little libertarian heart would not have wanted to include many of the things we have today, including the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve. I opposed the bailouts of the financial sector in 2008 and still oppose similar programs.
Yet the question “what still works?” raises another important question – often the most important question: “Compared to what?” And one of the lessons of the 2008-09 financial crisis was that the FDIC and the Federal Reserve and many other similar institutions – however imperfect they may be, and however philosophically vexing their existence – work quite well. We could have done much worse during those years, and we could have done much worse during and after the COVID-19 pandemic. Our European cousins are no fools and villains, but they have struggled with inflation more than we have in recent years, in part because of their self-imposed vulnerability to energy shocks.
A few weeks ago, my friend David French caused a stir when he wrote the least surprising column he ever wrote during his time at the New York Timesin which he declared that he intended to vote for Kamala Harris to “try to save conservatism.” While there were some thoughtful responses, the right largely snorted in unison, and critics wanted to know: What benefit could a vote for Kamala Harris bring from a conservative perspective? Putting aside the fact that this election is unlikely to give the Republican Party what it most needs—the humiliating, crushing defeat in 48 states needed to bring these evildoers to their senses—perhaps we could find the answer in a few boring things, like allowing the Fed to continue to be one of those things that works pretty well.
If by “conservative” you mean “ideologically right” or “doing things that give power to Republican Party politicians,” then you certainly understand and support Donald Trump’s recent comments (which he has already backed off, of course) that as president he should have more control over Fed policy because – and let’s quote the buffoon to get the full dose of intellectual rigor on display here – “I’ve made a lot of money. I’ve been very successful. And I think I have better instincts than, in many cases, people who sit at the Federal Reserve or are the chairman of the Federal Reserve.” So there’s that.
Then-President Donald Trump watches as his nominee for Federal Reserve Chairman, Jerome Powell, takes the podium during a press conference in the Rose Garden of the White House on November 2, 2017. (Photo by Drew Angerer/Getty Images)
If, however, you understand “conservative” to mean the following… conservative … then Kamala Harris’ stated policy preference (stated here with the caveat that one must check her positions every 20 minutes to see which of Trump’s positions she has adopted) is the more conservative option, iethe tried and tested conservative policy of leaving everything as it is. “The Fed is an independent institution,” she said recently. “As president, I would never interfere in the Fed’s decisions.”
Who knows if she’s serious. But however serious we may be about her statement, Harris’ laissez-faire attitude toward Fed independence is certainly more conservative than Trump’s instinctive approach of “give me power over this thing because I want it, and damn it, I’m still rich from reality shows and scam colleges despite being a completely incompetent real estate investor!”
If you want to change something at the Fed – and although I am inclined to leave it as it is for now, there is still a lot of reform to be done at the central bank – Trump’s instinct to politicize it and put it under the authority of the president is exactly the wrong way to go. As Dominic Pino put it on National review: “Independent monetary policy is better than monetary policy directed by politicians. Rules-based monetary policy is better than independent monetary policy.”
That is … probably right. If you want a more predictable monetary policy and a less discretionary policy environment, then a rules-based approach would be a big improvement. Of course, one would want to retain some discretion in extreme cases, which raises the question of who has the discretion to exercise that discretion, which puts us in a recursive loop that ends with us repeating our confession that man is a fallen creature, crooked wood from which no straightforward monetary policy can be made, etc. But we don’t need to go back that far.
What would a rule-based system look like? There are two main models.
One of them is the introduction of a “Taylor rule,” which has the reassuring aspect of involving a bit of math. Not that the rule’s namesake, John B. Taylor, thinks policymakers will be breaking out the slide rules: “But if there is one thing that modern macroeconomics is clear about—and on which there is widespread consensus—it is that policy rules have major advantages over discretion in improving economic performance,” he wrote in his famous 1993 essay on the subject. “It is therefore important to retain the concept of a policy rule even in an environment where it is virtually impossible to mechanically follow the algebraic formulas that economists write down to describe their preferred policy rules.” Taylor offers some algebra and – remember that he wrote this in the early 1990s – noted: “What is perhaps surprising is that this rule applies remarkably well to actual policy performance in recent years.” The fact that there is no rule that says the Fed must Following a rule does not mean that the Fed is actually operating arbitrarily. Taylor rules (there are some variations) focus on the Difference between the desired inflation rate and the observed inflation rate, which has long been the effective convention among competent modern central bankers. But there are challenges: you need to measure many variables with a high degree of accuracy to follow a Taylor rule rigorously and effectively.
This is an important argument for the main alternative to the Taylor rule, so-called “nominal GDP targeting,” a policy eloquently advocated by Ramesh Ponnuru, among others. Nominal GDP targeting adjusts policy in response to a single variable: the general level of spending in the economy. Nominal GDP can rise for two reasons: 1. due to economic growth; 2. due to inflation. (Similarly, it can fall due to economic downturns or deflation.) To simplify (greatly!), this model assumes that it doesn’t really matter whether nominal GDP grows due to real economic expansion or due to inflation or—as is almost always the case—due to a mix of both. If the economy is growing very fast, then you want higher interest rates to prevent it from growing so fast that it creates inflation; if it is growing due to inflation, then you want higher interest rates to reduce inflation. David Beckworth and Joshua R. Hendrickson of the Mercatus Center argued in a 2016 paper: “Unlike the Taylor rule, which requires knowledge of inflation, actual and potential output, a nominal GDP target requires only knowledge of total spending.”
Whatever version of rules-based monetary policy you prefer philosophically, the goals are the same: We want monetary policy that promotes growth and all the good things that growth brings (jobs, higher wages, wealthier families, etc.) while maintaining a reasonable level of price stability. We want monetary authorities—whether they are flesh and blood and pinstripes or mostly algebra—that achieve this in a predictable way, because we already have enough drama and chaos in our public life. There is not much to be said for giving the president more power in monetary policy, and none Apart from that, there is talk of giving Donald Trump all power in monetary policy.
Marcus Aurelius advises political leaders not to worry too much about what future generations will say about them. (He is known to readers as a Stoic philosopher, but it should be remembered that he was actually an emperor.) Look around! he wrote. (I am paraphrasing it.) You don’t place much value on the good opinion of people of your own generation, so what makes you think that the judgment of future generations could be more important? I don’t think much of Donald Trump – if you haven’t noticed – but I don’t think future presidents fewer likely to be gloomy, fickle, fickle, cowardly, or enslaved by their passions. For this reason, if not others, I think the prospect of giving presidents or other elected officials more power over monetary policy, rather than leaving that power to an independent central bank, is a terrible idea. There is a lot of talk right now about “threats to democracy,” and I share some of those concerns, but there are areas where we fewer Democracy is also affected, and monetary policy is one of them.
If the discretion of our central bankers ends up costing us more than it’s worth, we have some options for imposing rules-based constraints on them. Some critics say we’re already at that point, and some of them have pretty good arguments for it. But I’m not yet convinced that it’s wise to destabilize things today in order to achieve more stability tomorrow. If Kamala Harris really wants to leave things alone and let the Fed do its job, then she’s hit on the right policy, which also happens to be conservative.
