On Friday, the New York Times reported on the great economic conclave ongoing in Jackson Hole, Wyo.:
The economy is right about where the Federal Reserve wants it, running neither too hot nor too cold, Jerome H. Powell, the Fed chairman, said in a speech on Friday as he argued for caution and risk management.
Mr. Powell’s comments, at an annual gathering of leading economists and central bankers in the Grand Tetons, indicate that the Fed’s strategy of moving slowly in raising interest rates is likely to stay in place. He argued for remaining open-minded about just how low unemployment can go or where rates might end up, suggesting the Fed would be guided by data rather than by assumptions.
Many took Powell’s statement as a rebuke of President Trump, who is manifestly not happy with this moderately hawkish approach to monetary policy. Earlier in the week, the Times reported:
President Trump complained to wealthy donors at a fund-raiser in the Hamptons last week that the man he chose as chairman of the Federal Reserve, Jerome H. Powell, has disappointed him by raising interest rates, according to people who attended the event.
In the midst of a long riff on the economy, Mr. Trump said that he had expected Mr. Powell to adhere to an easy-money monetary policy, by keeping interest rates low, when he nominated Mr. Powell in November to succeed Janet L. Yellen. Instead, Mr. Powell has continued Ms. Yellen’s pace of gradual return to historically normal rates, by raising rates twice this year.
These dueling views on the economy are worth thinking about in a little more detail — for, though the issues are immediate, they speak to enduring contradictions in the effort of our republican institutions of government to regulate the national economy.
Trump’s view on the economy is easily appreciated from a political standpoint. Every president wants to be like Calvin Coolidge, Lyndon Johnson, or Bill Clinton: Have the economy run strong during your administration, and let the inevitable correction come during your successor’s term. This, in turn, is influenced by the public’s demand to keep the good times rolling forever.
This is one of the big weak spots in republican governments in modern, integrated economies. The people are often not reliable tribunes of wisdom and farsightedness when it comes to the nation’s finances. Indeed, this was the case even in pre-industrial America. Under the Articles of Confederation, matters of finance and regulation were left to the states, whose leaders — following democratic impulses — managed the currency and trade with gross irresponsibility. Later on, the great experiment in industrial protection, lasting from about 1815 until 1933, was a record of unmet expectations, political corruption, and eventually total calamity as high tariffs worsened the Great Depression. Why? Because while the Congress claimed authority to plan the economy, it lacked the capacity to carry out its ambitions. The politics of responsible economic growth are just too dicey for democratic institutions.
This is a big reason why we have the Federal Reserve, as well as so many independent regulatory agencies that manage key aspects of the economy without much direct oversight. There was a push for these sorts of institutions starting during the Progressive Era, and such agencies were added periodically, especially during the New Deal and Great Society periods. The idea is that immunizing experts from political concerns can free them to make decisions in the best interests of the nation.
But that solution creates problems of its own. For starters, the experts often do not possess the knowledge that they claim to have. It is exceedingly rare that any economist accurately predicts the next recession. And it is exceedingly common that the vast bulk of economists fail to see recessions even as they have already begun. Such was the case with the collapse of 2008–09 — which, we can now see in retrospect, was ongoing even when most economists thought the economy would muddle through.
Beyond that, experts are not so immune from political influence as they would like to think. Take the case of Fannie Mae and Freddie Mac. The mortgage giants effectively received huge subsidies from the federal government and used them in part to buy off politicians, but also to create what was basically an echo chamber among academics and other experts, to reinforce the ideas that federal housing policy was sound, and that the two mortgage giants were well run. In fact, nothing could have been further from the truth. But so pervasive was the influence of Fannie and Freddie that, still to this day, many policy elites are unwilling to come to terms with the breadth and depth of the lenders’ irresponsibility, for it would implicate them for having been, in essence, duped.
Additionally, policy experts are susceptible to all the proclivities of factionalism that characterize human beings generally. They tend to live near each other, go to the same schools, intermarry, and so on. In sum, they see the world through the same set of lenses, which can be quite different from how the rest of the nation sees matters. And even if they try to get beyond their own biases, and think about things objectively, there is only so much any human being can do to transcend the subjective. And as for groups of human beings? They are notoriously effective at reinforcing prejudices within their ranks. It is dangerous indeed when a group of people have wrongly convinced themselves that they can see the world objectively, when in fact they are as subjective as anybody else.
Perhaps the worst side effect of expert management of public policy is that it deadens civic engagement. Compare, for instance, the currency debate the nation had in 1896 with the debate of the past decade. The presidential contest in 1896, between William Jennings Bryan, the Democrat, and William McKinley, the Republican, boiled down to whether the nation would stay on the gold standard or implement a bimetallic standard that intermingled gold and silver as the basis for currency. Both sides made a lot of phony arguments, and there was plenty of unsound thinking to go around. Nevertheless, the country that year had a real debate about whether increased inflation was a good or a bad thing. And the verdict of that election — McKinley won a decisive victory — gave a democratic imprimatur to his proposed monetary policy.
What about recently? The Federal Reserve has done all sorts of unprecedented things over the past decade. But where has the public been? I would say, it’s been totally absent. Apart from a small clique of hard-money cranks who think the Breton Woods agreements were the biggest capitulations since Neville Chamberlain gave Hitler the Sudetenland at Munich, the public is really quite ignorant about monetary policy. They really do not even know what the Fed has done, let alone whether its moves were advisable. And why should they engage themselves? After all, the Fed takes care of the currency for them.
If I had my druthers, I would endeavor to find some way for the experts to maintain management of complicated public policies but with greater public accountability. Of course, policymakers have been searching for that happy ground to little avail for the last 100 or so years. We seem forever stuck between the Charybdis of majoritarian excesses and the Scylla of experts’ hubris. Trump’s complaints about Fed policy is just one more example of how hard it is to find that sweet spot, where the people can influence economic policy in a responsible, farsighted manner.
IN THE NEWS: ‘US and China Held Talks on Trade’