JONATHAN COHN SEPTEMBER 21, 2011
So now the Republicans want to go all Tony Soprano on the Fed.
On Tuesday, the GOP's four congressional leaders sent a formal letter to Federal Reserve Chairman Ben Bernanke. The Fed today finishes a critical two-day meeting, during which it will discuss whether to swing into action again, taking steps that could boost economic growth and reduce unemployment. Many and probably most mainstream economists think that's the right thing to do. The Republicans do not.
They were not happy the last time the Fed intervened. Most famously, Texas Governor and GOP presidential front runner Rick Perry described Bernanke's actions as "treasonous." This time, they're not waiting for the Fed to act. In the letter, they say the Fed "should resist further extraordinary intervention in the economy."
The letter gives some reasons why, according to the Republicans, further action would be ill-advised. Among other things, the writers (House leaders John Boehner and Eric Cantor, Senate leaders Mitch McConnell and Jon Kyl) say the Fed should offer "a clear articulation of the goals of such a policy, direction for success, ample data proving a case for economic action and quantifiable benefits to the American people." That part, at least, doesn't sound too hard to me: They could start by cribbing relevant material from Paul Krugman.
But let's not kid ourselves. The significance of this letter isn't the material in the text. It's the threat lurking behind it. If Bernanke and the Fed act, the authors are saying, Congress will get much more involved in the way the Fed conducts business.
As a matter of governing principle, would such involvement be problematic? Calls to make the Federal Reserve more accountable to elected officials have a long, bipartisan, and perfectly respectable history. (Here's economist James Galbraith making that argument, in the American Prospect, back in 1994.) And you can count me among the observers frustrated that the Fed hasn't been even more aggressive about boosting the economy, apparently because it takes its mandate to maintain stable prices more seriously than its mandate to maintain high employment.
But there is a proper way to impose such accountability: By requiring more transparency on Fed decision-making, changing the board's makeup or mission by law, demanding more answers when the Fed Chairman testifies before Congress. That's different from having Congress set monetary policy -- or threatening to do so via letter. That's what worries smart economists like Mark Thoma:
History tells us that politicizing monetary policy is a bad idea -- giving control of the money supply to politicians generally leads to high inflation -- and for this reason most countries have a monetary authority with some degree of independence.
Robert Reich, citing his experience in the Clinton Administration, agrees:
When I was Secretary of Labor in the Clinton Administration, it was considered a serious breach of etiquette — not to say potentially economically disastrous — even to comment publicly about the Fed. Everyone understood how important it is to shield the nation’s central bank from politics.
If global investors suspect the Fed is responding to political pressure of any kind, investors will lose confidence in the independence of the Fed and its monetary policies. Even if the pressure is to tighten the money supply and keep interest rates high, it’s still politics. And once politics intrudes, lenders of all stripes worry that it will continue to intrude in all sorts of ways. Lending to the United States becomes a tad riskier. As a result, lenders charge us more.
Henry Aaron, the Brookings economist, is more blunt. Via email, he calls the letter "simply a gentleman's version of Rick Perry's shrill cry." And, of course, there's the question of whether Republicans are deliberately trying to undermine the economy, since that would make it more difficult for Obama to win re-election. Via Steve Benen:
The “sabotage” question comes up from time to time, and this certainly won’t help. As things stand, Republican leaders, some of whom have admitted that defeating President Obama is their single highest priority, now want the Fed to sit on its hands, want to strip the American Jobs Act of its most effective measures, and want to raise middle-class taxes. Oh, and they’re threatening to shut down the government, too. These are just the positions they’ve talked up over the last week.
Whether or not you agree with these arguments, this letter seems to be of a piece with the Republicans' unprecedented use of the filibuster to block legislation, their refusal to confirm executive branch appointees over policy differences, and their willingness to use the debt ceiling as leverage in their efforts to rewrite the federal budget.
In other words, it looks like the Republicans are once again violating a political norm -- while advising action that could keep hundreds of thousands of Americans out of work -- in order to advance their policy agenda, their political cause, or both. They're breaking the rules, at least as currently understood, because it will help them get their way.
Say what you will about Tony Soprano, but even he lived by a code.
Update: Ezra Klein points out that this sort of thing is not entirely unprecedented: In 1982, for example, then-House Speaker Jim Wright, a Democrat, called for then-Fed Chairman Paul Volcker to resign because of his tight monetary policy. But, as with the use of the debt ceiling as a bargaining ploy, this effort seems more serious and threatening than anything we've seen in a long while. I've also adjusted the wording of this item to reflect that.