Scott Sumner  

Hillary Clinton on Fed structure

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Here's Ylan Mui of the Washington Post:

Democratic presidential front-runner Hillary Clinton said she would support changes to the top ranks of the Federal Reserve, an issue recently championed by progressive groups amid debate over how long the central bank should keep supporting the American economy.

The Fed is led by a seven-member board of governors based in Washington and a dozen regional bank presidents based across the country, from New York to Kansas City to San Francisco. The governors are nominated by the White House and approved by the Senate, but regional bank presidents are selected by a board of directors with nine seats, whose occupants are chosen by the banking industry and by the Fed governors in Washington.

In a statement to The Washington Post, Clinton's campaign said she supports removing bankers from the boards of directors and increasing diversity within the Fed.


My view on Fed reform is close to this, but not exactly the same:

1. Views on optimal Fed structure should not be based on whether you are a dove or a hawk, because you should not be a dove or a hawk, because there is no long run trade-off between inflation and unemployment.

2. Instead, we should look for a structure that leads to optimal decisions, not your preferred decision. I've always felt that the FOMC should be expanded from 12 members to 7 billion, and shifted from one-man, one vote to one dollar, one vote. In other words, an NGDP futures market.

3. Assuming we stick with the bureaucratic approach, I've argued that monetary policy decisions should be made by a panel composed of nothing but monetary experts. I do not favor making that panel diverse in an ethnic sense; indeed I have no problem with on FOMC composed on nothing but white male Jewish monetary economists, as long as it is diverse in an ideological sense. We need to pay a high enough salary to attract the 12 best monetary experts in the world---whatever it costs (within reason).

4. I favor moving away from a "central bank" and toward a "monetary authority", which is not involved in banking. Clinton's proposal seems like a baby step in that direction. If the Fed continues to do banking oversight, its regulations should be developed by a separate "banking committee" which has no oversight role in monetary policy. The banking committee should be composed of nothing but banking experts. In this case, I am much more tolerant of "diversity", as the issues seem (to me) to be far more political, and hence less technocratic, than monetary policy. Making the monetary policy committee diverse is just as absurd as injecting diversity into the (government) NASA committee that decides optimal launch dates.

5. I understand that many will violently object to my vision of a non-political monetary committee. My view is based on the premise that Congress gives the committee its mandate, and filling out that mandate is essentially a technical question. The current mandate is a bit vague, and I interpret that vagueness as the Congress saying, "We don't know if 'price stability' means 0% inflation or 2% inflation, you decide. If we knew, we would have told you. And we don't know the validity of the Phillips curve model. You decide. And we don't know if level or growth rate targeting is better. You decide."

6. Elsewhere I've argued that Congress should change the mandate in such a way as to make it easier to determine if monetary policy had been successful. That would involve the Fed revisiting past decisions and then telling us whether, in retrospect, policy had been too easy or too tight. The Fed would also describe the metrics that allowed them to make that determination. They should also be required to construct some sort of transparent policy rule, albeit not necessarily an instrument rule in the "Taylor Rule" sense of the term.

PS. Over at TheMoneyIllusion I have a post responding to Bryan's recent post on consols and liquidity traps.

HT: TravisV, Ben Klutsey


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COMMENTS (11 to date)
John Hall writes:

I pretty much agree with all of your recommended reforms, but my reaction to this was quite negative.

I suppose the reason I reacted negatively was because it was like the left finally got around to looking at the Fed and decided that diversity was the problem. Their critique of the Fed just seems so limited and un-inspiring.

For instance, under what economic theory should the Fed respond more strongly to black unemployment? Should the Fed also try to resolve the gender pay gap?

When did these issues become the province of monetary policy?

ThaomasH writes:

I guess these questions mean I still do not understand your theoretical position and policy recommendation sufficiently. Guessing I’m not alone I seek clarification of the following statements:

because there is no long run trade-off between inflation and unemployment.

Is this consistent with your view that, given sticky prices, a lower inflation ceiling implies higher unemployment/lower NGDP growth than a higher ceiling or no ceiling at all?

I've always felt that the FOMC should be expanded from 12 members to 7 billion, and shifted from one-man, one vote to one dollar, one vote. In other words, an NGDP futures market

Even if the Fed decides to target NGDP, doesn’t it still have to decide what to buy or sell and in what amounts and when to return NGDP to target levels when it deviates? Or do you mean that the Fed should do nothing but buy or sell NGDP future contracts in such a way as to hold the rate on the targeted trend?

Benjamin Cole writes:

Ugh. Diversity--in other words, identity politics. P.U. I suppose that may even be how we got Janet Yellen instead of a more ambitious or aggressive central banker.

I suspect any collection of monetary experts in the last 30 years would be far too conservative, small "c." Some of these experts actually believe the equations and chicken scratches they have in their papers. John Taylor is an expert and so are John Cochrane and Charles Plosser. Yellen is an expert.

Egads. Would not better results be delivered by real estate developers?

s.

Dennis writes:

The second half of your point 5 seems to undercut the first sentence. I agree that technical understanding should be most important in deciding how to interpret the mandate, but so long as bureaucracy and discretion remain, politics cannot be fully removed from value judgements about various tradeoffs, and diversity can help average out biases in those value judgements.

michael pettengill writes:

So, 6 is really tax and spend, right?

Why don't you trust the for profit sector to do the research to be used to determine Fed policy?

Jay writes:

Am I the only one that sees her suggestion to "increase diversity" and stop taking the rest of her statement seriously at all? Isn't her entire statement summed up by for-profit bankers=evil and diversity for all?

MikeP writes:

Jay, You are not the only one. I was astonished.

I guess Hillary Clinton had to find something as colossally stupid to say as Donald Trump said with his idea to renegotiate the federal debt.

Between the traction gained by the brazen economic illiteracy of Trump and the traction gained by the brazen economic illiteracy of Sanders, the worst thing to come out of this election may well be the end of any semblance of rationality from the political class.

Edogg writes:

Scott and everybody,
I think Hillary Clinton's statement is referring to "diversity" in career backgrounds as well as ethnicity and gender.

John Hall, you say,
"For instance, under what economic theory should the Fed respond more strongly to black unemployment? Should the Fed also try to resolve the gender pay gap?

When did these issues become the province of monetary policy?"

Of course the Fed shouldn't respond more strongly to black unemployment per se. But blacks have a higher unemployment rate than whites. I find it easy to imagine the Fed not doing enough about unemployment in general.

Khodge writes:

Edogg, judging what Clinton says about SCOTUS diversity, it is safe to conclude that diversity refers strictly to physical appearance (including 9 women being more diverse than a 5/4 female to male split) rather than any semblance of diversity of background or thought.

Scott Sumner writes:

Thaomas, I've always argued that money is roughly neutral in the long run.

I believe they should buy and sell Treasury bonds. As far as how quickly to return to the trend line, I'd leave that up to the Fed.

Michael, You asked:

"Why don't you trust the for profit sector to do the research to be used to determine Fed policy?"

I did say I prefer the private sector do the research. My point 6 was assuming that my advice on privatizing monetary policy was rejected. In that case, I want more accountability from the Fed.

Everyone, I certainly don't want to defend Clinton's comments on diversity, or even speculate as to what they mean. I think it's fair to assume that she doesn't agree with my view that the monetary policy committee should have the 12 most qualified monetary policy experts.

Prakash writes:

@John Hall

"under what economic theory should the Fed respond more strongly to black unemployment"

Your answer might lie in the fragment of the comment by @dennis

"but so long as bureaucracy and discretion remain, politics cannot be fully removed from value judgements about various tradeoffs"

I think politics cannot be fully removed in any democracy. That is quite literally the definition of democracy.

One might imagine a population of 60% Hutus and 40% Tutsis. Assume despite Hutus being the majority, the Tutsis hold a majority of the capital. The Tutsis prefer to employ fellow Tutsis until they are absolutely have to look to outside labour. The Hutus themselves prefer to hire Tutsis (Again all of these assumptions can be challenged but looking at the actual behaviour of market dominant minorities all over the world, they are by no means exaggerations)

A monetary policy that targeted the NGDP path might be very good and keep the Tutsis very happy, but one that tracked the 30th or 40th percentile income (again level target) might be even better in terms of political stability. In the latter, you're forced to take into account the welfare of a decent amount of Hutus and at a 29th percentile income LT, you have a majority of Hutus.

Now it is very much possible that this might lead to higher NGDP growth than is needed for the polity, but the important thing is that this policy will be stable. The central bank would've done its bit to be credibly anti-elitist. That might matter a great deal in a liberal democracy.
(As opposed to the most expected illiberal equilibrium which is the Hutus vote in socialists to grab wealth and the Tutsis vote in fascists to crush those who might come for their wealth or worse)

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