George Will turns his incisive eye to the Federal Reserve over on the Washington Post.
Today at the Washington Post, George Will turns his incisive eye to the Federal Reserve:
The Peter Principle is: “In a hierarchy, every employee tends to rise to his level of incompetence.” The Federal Reserve’s behavior illustrates an analogous principle: Institutions that are flummoxed by their primary responsibility will fail upward by embracing more urgent and noble purposes.
Will is referring to the Fed’s embrace of any number of goals not directly related to inflation. We’ve covered a few here at Capital Matters. See John Cochrane on “climate risk” or Thomas Hogan on DEI or Desmond Lachman on ignoring early signs of inflation.
Will writes:
Like 7-year-old soccer players all congregating around the ball, Washington eminences want to cluster around the issue de jour, which today is climate. For the Fed, the temptation is irresistible because no one resists its mission creep.
Central-bank independence is a good thing, and it ought to be preserved. But economic research supports independence as an effective way to control inflation. It does not support independence as an effective way to alleviate racial inequality or reduce the temperature of the planet. When the Fed tries to do things it can’t do, we shouldn’t be a surprise that the thing it can actually do — control inflation — gets pushed aside.
As Chris Edwards pointed out yesterday, the Fed’s staff has grown significantly in the past ten years, and average salaries have increased. Specifically, “The Fed has become more top heavy with a larger bureaucracy in Washington.” It’s not quite as bad as ballooning university administration, but it’s a similar trend.
The mission creep that Will points to is a real problem, and it could undermine the Fed’s independence if it isn’t stopped. Eventually, some politicians will start to demand more control over monetary policy. We know that that is likely to produce worse monetary policy, but if the Fed continues to slack on its actual job while trying (and failing) to do others, voters are more likely to give those politicians a hearing.
Independent central banks must constantly work to earn trust from citizens in a democracy. That means resolute focus on stable prices, not joining whatever groupthink happens to be fashionable in Washington at a given point in time.