Monetary Policy

Confirm Judy Shelton to the Fed Board of Governors

Judy Shelton testifies before a House committee on her nomination to the Federal Reserve Board, February 13, 2020. (via C-SPAN)
Shelton would add much-needed viewpoint diversity to the Federal Reserve.

It’s make-or-break time for Dr. Judy Shelton, President Trump’s controversial nominee to the Federal Reserve Board of Governors. Shelton’s nomination had stalled after some Republican senators said they wouldn’t vote for her. But on Thursday evening, Senate Majority Leader Mitch McConnell announced Shelton would receive a final vote sometime next week. Senator Lisa Murkowski’s (R., Alaska) change of heart seems to have made the difference.

Ever since Shelton came to public attention, she’s drawn fierce criticism from policymakers, the press, and professional economists. This isn’t surprising. Given the power of Board members, potential confirmations are high-stakes. The Board of Governors is the body that oversees the Federal Reserve System. All members of the Board of Governors serve on the Federal Open Market Committee, which is responsible for important monetary-policy decisions.

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.

All three of these criticisms are exaggerated: The first two are nonsense, and while there is some truth to the third, it’s not enough of a problem to outweigh the benefits of an outsider on the Board. Shelton’s opponents are motivated by style and status, not substantive arguments. (Full disclosure: I am a senior fellow with the Sound Money Project, which Shelton used to lead. My tenure began after hers ended.)

It’s true that Shelton has said positive things about the gold standard. As a monetary economist, I know how risky it is to question the conventional wisdom. Monetary economists, especially ambitious ones, hate the gold standard, because the Fed has an outsized influence on monetary-economics research, and the last thing an economist looking to move up in the world wants to do is say nice things about a system that works just fine without a central bank.

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.

That Shelton understands the strengths of the gold standard makes her more suited to serve in an important role, not less. Knowing how alternative monetary systems work can give us a better perspective on our own and make it easier to improve it.

As for her credentials, it’s true that Shelton doesn’t have the typical background of a monetary policymaker. But so what? Economists, of all people, should understand that credentials are an input into being a capable policymaker, but what matters is output. And apparently there are multiple ways of producing that output: The current Fed chairman, Jerome Powell, has a legal and banking background, not an academic background. That didn’t stop the smart set from lauding him as the “world’s best bureaucrat.” Of course, Powell’s degrees are from Princeton and Georgetown, whereas Shelton’s are from Portland State and the University of Utah. It reflects poorly on economic policymakers to engage in such obvious status-based discrimination.

Finally, we come to the only valid argument against Shelton: Her views on monetary policy suddenly changed from the Obama administration to the Trump administration. When Barack Obama was president, Shelton was a monetary hawk. But under President Trump, she has become much more dovish. To the extent that this shift suggests deference to the president who nominated her, it is indeed worrying. But it’s nowhere near as worrying as it was before the election. After all, Trump lost. Come January, he’s gone. It’s hard to see how Trump can pressure Shelton from Mar-a-Lago.

While the chairman of the Fed has incredible power to determine monetary policy, the other members of the Board matter, too. The Board is a deliberative body, and we should want a wide range of views represented to stave off insularity and groupthink. Shelton’s contrarian views would ensure that the Board confronted hard questions head on. Rather than impede effective monetary policy, Shelton would improve it by raising the level of debate and discussion. Given the Fed’s utterly unimpressive record since the 2008 financial crisis, an outsider perspective is just what we need. That’s why Shelton should be confirmed.

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