One of the many, many conspiracy theories that Donald Trump peddled during the election campaign was that the Chair of the Federal Reserve, Janet Yellen, was manipulating the country's monetary policy. He was wrong, but he was tapping into a deep strain of paranoia on the American right about the powers of our central bank.
We will soon see how Trump treats the unique political independence of the Fed. Even before he takes office, however, there are reasons to worry. In monetary policy, as in so many other areas of governing, Trump's presidency brings with it the threat of abuses of power not seen since the Nixon Administration.
Although the Fed was never more than a minor supporting character in this year's campaign drama, it nonetheless has been fighting off attacks on its independence for decades. And even though those attacks have of late originated mostly from the libertarian right -- a group that discovered to its chagrin that Kentucky Senator Rand Paul was not their ticket to the White House -- Fed-bashing can be a bipartisan affair.
Occupy Wall Streeters and Bernie Sanders supporters (two groups with a great deal of overlap) have lustily joined with conservatives in calling to "end the Fed" or "audit the Fed." This would be an enormous mistake, but it is something that is now ever more possible during a Trump presidency.
As it happens, Michael Dorf and I have been thinking and writing about the Fed for some time now. In addition to our various columns and blog posts over the past few years, last week saw the publication of our new article in the Cornell Law Review: Don’t End or Audit the Fed: Central Bank Independence in an Age of Austerity.
When we began writing that article last year, we anticipated that the next president would be either Hillary Clinton or one of the establishment Republicans like Jeb Bush, Chris Christie, or maybe Marco Rubio. We were mostly focused on the likelihood that Clinton would be the next president and that the Republicans would maintain control of at least the House of Representatives.
Had we (and nearly everyone else) been right in that prediction, the questions would have been whether the attacks on the Fed's independence by Republicans would continue, and how President Clinton would respond.
From the standpoint of political likelihood, it seemed easiest to imagine another go-round in which House Republicans would threaten not to increase the federal debt ceiling. In that case, unless the president were willing to follow the advice that we offered in earlier Buchanan-Dorf articles (a short version of which can be found here), which would require her to treat the debt ceiling statute as a dead letter, the only way out would be to rely on the Fed to save the day.
It is important to remember that this threat is still out there, should we ever return to a time when a Democrat is president and the Republicans control at least one house of Congress. In the meantime, however, it turns out that our article has only become more important in light of Trump's eye-of-the-needle Electoral College win. The political independence of the Fed could soon become a point of major contention, especially in the lead-up to the 2020 election.
The puzzle that Professor Dorf and I tried to solve in our article was whether there is any reason to protect the Fed's independence when the political consensus is running in favor of austerity rather than excess. Why is that a puzzle?
As the world discovered in the years following the Great Recession (also known as the Obama years), the Fed has very limited powers when it comes to fighting a severe slump. Once it has cut its key interest rate to zero, there is very little that the Fed can do if the economy is still struggling -- especially when the Republicans are insisting on maintaining fiscal austerity despite chronic wage stagnation and slow job growth.
It is, in fact, something of a miracle that the economy is as strong as it is today. The Fed, through its "quantitative easing" programs, figured out an innovative way to give a bit of an extra boost to the economy. The Obama Administration did everything within its executive powers to help strengthen the economy.
Otherwise, however, we learned again that if politicians are willing to inflict enough pain on other people for a long enough period of time, the economy will eventually bottom out and start to grow. That those politicians would then be rewarded at the polls by the very voters who were victimized by Republicans' intransigence continues to amaze me, but there you have it.
Although a central bank has only a very limited ability to heat up an economy that is ice cold, it has always been true that central banks can further heat up economies that are already reasonably temperate. In other words, the Fed's powers are at their greatest when it is dealing with an economy that is in something like a normal range.
The biggest fear has always been that monetary policy can take a normal or strong economy and overheat it. That is precisely why most advanced democracies have created central banks that are politically insulated. Otherwise, craven politicians would find it only too easy to open the monetary spigot to enhance their political popularity, temporarily creating a boom but inevitably leading to a surge of inflation that can only be stopped through painful austerity after the next election.
In our article, therefore, Professor Dorf and I asked whether it was even sensible to worry about expansion-happy politicians in a world where the dominant political norm tended toward a deep commitment to austerity. That was the puzzle: Does political insulation of the Fed matter when no one wants to do the very thing (pump up the economy to dangerous levels) that justifies the Fed's independence?
We said yes. Although we were able to lay out ways in which even a Clinton-versus-Republicans version of divided government would benefit from the Fed's independence, we invoked Vincent Blasi's "pathological perspective" on the First Amendment to justify a worst-case approach to political excesses. That is, it might seem that we do not need to protect free speech when no one is attacking free speech, but we should always be aware that a time will come when free speech will again be under attack.
Welcome to post-November 8 America! Not only is free speech itself being threatened, but we now unexpectedly find ourselves looking at a president-elect who cares nothing about norms -- presidential conflicts of interest? careful diplomacy? qualified cabinet picks? ha! -- and who would readily use the Fed (or anything else) to advance his aims.
As I put it in a recent Verdict column, Trump has taken a "Who's gonna stop me?" approach to governing. There are very good reasons why presidents have put their assets into blind trusts, for example, but Trump knows that no one is even going to try to make him do what he has no intention of doing.
This means that Trump, who accused the Fed of being a political pawn of Obama, will do what he can to make it his political pawn. If the economy is not strong enough for his liking in 2018 or 2019, he will lean on the Fed to pump it up. The most notorious example of this kind of political manipulation of the Fed was during Richard Nixon's 1972 reelection campaign, when the Fed chair orchestrated a monetary expansion that helped guarantee Nixon's victory (but that led to bigger problems later).
There is already some talk that congressional Republicans who once claimed to favor economic austerity might be convinced to run up deficits on the promise that the Fed would raise rates to mitigate inflation. That is, they are essentially being told that the Fed will continue to act in the way that it has in the post-Nixon years, knowing when to "take away the punch bowl" so that the economic party does not get too far out of hand.
In addition, the latest news reports indicate that Trump's pick for Treasury Secretary has said that a Trump tax cut plan will not include a net tax cut for rich people. Supposedly, the tens-of-trillions-of-dollar tax cuts that Trump promised are now off the table.
Maybe, but more likely this is yet another case in which Trump is perfectly willing to take inconsistent positions on economic policy. Professor Dorf and I, late in the editing process for our article this Fall, added this footnote:
"Campaigning as an economic populist (when not campaigning as a racist, misogynist, and xenophobe), Republican presidential candidate Donald Trump has repeated the calls by others in his party to 'audit the Fed,' but at least one commentator opined 'that Trump’s heart isn’t really in it.' Given the hyperbolic and opportunistic nature of Trump’s policy pronouncements, we would not hazard a guess as to his true druthers, if he even has any. We would note, however, that Trump’s signature contribution to public debate about the government debt was the one idea that may be more dangerous than subjecting the Fed to greater political control. Specifically, Trump suggested pressuring holders of Treasury securities to accept less than full payment, thus jeopardizing the credit rating of U.S. debt. Trump subsequently pretended not to have meant what he obviously said, but the incoherence of his explanation simply underscores that Trump has little understanding of economic policy."Again, the point is that no one knows what Trump intends to do, and he himself seems not to know from one moment to the next. So even if his Treasury pick says that federal borrowing will not go up as much as Trump promised during the campaign, extreme skepticism should be the order of the day.
In other words, the Fed may or may not need to respond to an unwise expansion of federal borrowing. It may or may not be in a position to lean against economic overheating at a time when the president wants the economy to expand. It may or may not find the norm of Fed independence under severe assault.
What would such an assault look like? The easiest way for Trump to turn the Fed into a political tool would be to find appointees to the Fed's Board of Governors -- and, next year, a replacement for Yellen -- who would do his bidding. If Trump were to put, say, Donald Trump Jr. in charge of the Fed, what then? Trump Jr. has already been pushing the claim that the government's unemployment statistics are bogus, so all bets are off on what would he do to the Fed.
The question at that point would be whether the other voting members of the Fed's policy committee would push back against the White House. Five of the twelve voting members are not political appointees, and not all of the other seven slots are going to be filled by Trump appointees (for now, anyway).
Maybe the technocratic impulse of the economists who populate the Fed will cause that important institution to refuse to roll over. As I noted in a recent column, there is real power in the federal workforce, because it is made up of people who are highly knowledgeable and who do not readily abandon protocol in the face of political bluster.
If Trump demands that the Fed make unwise policy decisions, therefore, the people who work at the Fed might not comply. That would surely carry risks, because the Fed's independence is partly norm-based (for which, as I noted above, Trump has no respect) and partly statutory. Standing up to the president could result in changes to the law that will put monetary policy much more directly in the hands of politicians.
This means that we should watch carefully to see how Trump and his minions treat the Fed. The central bank is in a unique position to do good and -- much more to the point -- to prevent other people from wreaking havoc. A time might come when the people who work at that institution will be forced to make some very difficult choices.