Friday, March 29, 2019

Trump's Politicization of the Fed and the Death of Expertise

by Neil H. Buchanan

Donald Trump wants a guy named Stephen Moore to be the next person to join the Board of Governors of the Federal Reserve System.  Even if the only part of the previous sentence that you can follow is "Donald Trump wants," you know that whatever comes after those words is almost certainly based on ignorance, stupidity, or venality -- or, most likely when dealing with Trump, all three.  And in this case, the situation is truly, truly bad.

As background, the Federal Reserve System (the Fed) is the name of this country's central bank (given that opaque name in 1913 to fend off populist fears of an all-powerful Bank of the United States).  The Fed is required by law to set monetary policy to maximize employment and economic growth while minimizing inflation.  Although it has a number of policy tools available, the Fed's key ongoing decision is whether to increase or decrease interest rates.

Stephen Moore is a hack.  He is what other hacks point to when they are accused of being hacks, saying, "Hey, I'm not a hack.  He is a hack!"  Moore is not merely a hyper-conservative partisan, although he is that.  He is also spectacularly wrong all the time, and he is willing to say anything -- anything at all -- to try to score political points.

A moment ago, I googled the words "Stephen Moore dishonest," and the top hits had these titles: "Further Documentation on 'Stephen Moore is a Liar'" from January 1, 2018, "This Trump advisor might be even more confused about climate and energy than Trump himself," from September 9, 2016, "Stephen Moore is Not a Real Economist," from November 28, 2017, and (skipping a highly negative piece simply titled "Stephen Moore") "Stephen Moore is Good at Being Wrong," from two days ago.

Truly, this is a standout moment in Trump's presidency, finding an appointee so bad that he makes people wonder whether we owe Betsy DeVos, Scott Pruitt, and Wilbur Ross apologies.  (No, we definitely do not, but still.)  Moore is so aggressively ignorant and unwilling to acknowledge reality that the only wonder is that he had not already been nominated by Trump to some other position.

As much fun as it would be to continue the pile-on in the Moore-mocking Olympics, however, I want to use this as a moment to reflect on the continuity between the Republican Party's descent over the past forty years or so and what is happening under Trump.  As in so many things (most obviously its bigotry, where a party that was more than happy to play footsie with white supremacists and use dog-whistles to scare white voters has now decided that it no longer needs to bother with pretenses), Trump does not represent a break from Republicans' recent history but merely its logical and inevitable continuation.

Moore is a particularly good exclamation point in seeing all of that, but he is nothing more than an extreme among extremes.  It is, however, interesting to think about this in the context of some recent history.  Republicans once claimed to value expertise -- puffing themselves up as the "party of ideas" -- but if that were ever true (no), it certainly has not been true for decades.

The Moore situation is especially interesting because the Fed is so important to the business wing of the Republican Party.  Chamber of Commerce types know that the Fed is a uniquely important institution, because having an apolitical, technocratic central bank is not just good for business but absolutely essential to economic prosperity.  Trump does not cotton to being apolitical or to trusting technocrats, so that is a problem.

This is similar to the horror that the business wing felt in 2011 when it became clear that the Tea Party insurgents were actually going to use the debt ceiling as a political weapon.  As I wrote at the time, in "Is This Why They Bought Congress?" the money guys must initally have been amused when the rubes started railing against Barack Obama and wearing tea bags on their hats.

After all, Obama and the Democrats had passed a (relatively weak, but still important) financial market regulation law, and the Affordable Care Act had been financed by genuinely progressive taxes.  How great for Wall Streeters and corporate titans that little people were pillorying Obama, all with a little bit of help from astroturf groups and some untraceable financing?  The Republican takeover of the House in 2010 was a dream come true.

But that all came crashing down when it became clear that the people at the grass roots were pitchfork-wielding populists who did not care whether they brought down the financial system.  Years of near-misses on the debt ceiling had everyone in the boardrooms sweating, because financial markets (and the businesses that rely on those markets, which means all businesses) would have melted down if the debt ceiling had ever not been increased or suspended on time.

The Fed is both more and less important than that.  That is, having a total hack on the seven-person Board of Governors, which would automatically make him one of twelve votes on the Fed's policymaking committee (details too annoying to explain here), will not cause the global economy to crash in the way that a debt ceiling-related crisis would have immediately done.  So the world can likely survive having a Moore on the Fed (or even two of them, given that Trump is surely able to find someone even worse than Moore for the other open seat).

On the other hand, the Fed is politically insulated and dependent on technocratic expertise for a reason.  Professor Dorf and I wrote about the importance of the Fed's independence in a Cornell Law Review article a couple of years ago, noting that although there are reasonable differences of opinion about the optimal degree of Fed independence, one can be an American progressive (and thus not an apologist for Wall Street) and still see that a large degree of political independence is essential for the Fed.

Why?  Because of people like Stephen Moore and Donald Trump.  The reason not to have Congress directly set monetary policy (which is what the Constitution provides) and instead delegate that awesome responsibility to relatively independent technocrats is that politicians have short-term interests that create temptations to use monetary policy to win elections, and this can have disastrous effects within only a few years.  (Republicans like to point to Venezuela as a cautionary tale about socialism.  It is in fact only the latest sad tale about politicized policy decisions leading to hyperinflation.)

Indeed, much of the commentary lately indicates that the financial establishment is worried that simply having a Trump hack on the Fed will cause financial markets to assume that policy will become politicized.  This would cause markets to engage in wasteful defensive maneuvers right away, harming the economy almost immediately.

Moore would, therefore, be a terrible person to have anywhere, but especially at the Fed.  Trump already has placed completely unqualified hacks in other key positions, from Larry Kudlow as economic advisor to Mick Mulvaney as chief of staff to Steve Mnuchin at Treasury (a different kind of hack, to be sure, but not someone who would have been on anyone's A-list, or even D-list, for any other Republican administration).  Moore is even worse than they are, and he might soon be in a position to do much more harm than they can.

As I noted above, however, this is not something that suddenly happened under Trump.  When the Moore nomination was announced, I found myself thinking back to a New York Times column that Paul Krugman wrote in 2000, during the period when it was not yet clear whether Bush or Gore would win the post-election battle over hanging chads in Florida.

Krugman noted that George W. Bush was relying on the economic advice of a uniquely under-qualified political operative named Lawrence Lindsey, whereas the outgoing Treasury Secretary in the Clinton Administration was Lawrence Summers.  Krugman noted that the differences between "the two Larries" provided a window into the diverging commitments to expertise by Republicans and Democrats.  Again, this is more than eighteen years ago.

Larry Summers is, by anyone's measure, a superstar economist.  He is notably personally abrasive, which is part of what caused his time as President of Harvard University to end quickly, but even people who cannot stand Summers are awed by his intellect.  And he is not some ivory tower type, although he conquered academia easily at a very early age, with Harvard and MIT both throwing offers of tenure at him while he was still in his 20's.  His transition into policy roles was hampered by his impatience, but he is a star.

Larry Lindsey is not a star.  He did briefly teach a course at Harvard, but that was because he was brought on to do the real work for the big introductory economics course that was nominally taught by Martin Feldstein (a star conservative economist who served in the Reagan Administration but will not touch Trump's world).

Krugman correctly pointed out that Lindsey's subsequent career was entirely driven not by being a good economist but by being a loyal Republican and Bush family acolyte.  Lindsey, in fact, briefly served on the Fed when the senior Bush put him on the Board of Governors, even though Lindsey was nowhere near as qualified as many other reliably conservative economists.  Lindsey did not stay long, preferring instead to resign his seat and go back into the conservative think-tank world -- the world that also gave us Stephen Moore.

Krugman then offered what might have seemed to be a back-handed compliment: "The point of this comparison is not that Mr. Summers is smarter than Mr. Lindsey; Mr. Summers is brilliant (ask him, he'll tell you), but Mr. Lindsey is no dummy."  As a graduate student, I taught a section of the course that Lindsey managed, and I can report that Lindsey is indeed no dummy.  He has a Ph.D. from Harvard, and he can make and follow arguments that draw on data and theory.

But talk about faint praise!  I generally avoid sports comparisons, but I will indulge myself here with a baseball analogy.  Summers is a surefire first-ballot Hall of Famer who would be on almost everyone's "among the best of all time" lists.  Lindsey is a guy with a brief minor league career who had a three-week stint in the Show at the end of one season when rosters were expanded.  The difference truly is that extreme.

Now, we should all remember that even the guys with short minor league careers are actually excellent ballplayers, better than most people can imagine.  Lindsey can do economics better than the vast, vast majority of people.  But he is in over his head with the people who used to dominate Washington's policy circles.  (People laughed at him behind his back.  Seriously.)

Fast-forward into the Obama Administration, and Senate Republicans in 2011 blocked the Fed nomination of Peter Diamond, an MIT professor who won the Swedish Bank Prize (the not-really-Nobel) and who is at most a slice below Summers in terms of pure expertise.  Republicans argued that the area in which he was most qualified, labor and pension economics, was not monetary theory -- which apparently meant that he knew nothing about monetary policy and thus was unqualified to be on the Fed at all.  Again, this is the same Fed on which Lindsey had once served.  (Lindsey's dissertation was about tax policy, not monetary policy, for what that might be worth.)

And here we are in 2019, with people wondering whether enough Senate Republicans will look at the blatant hackishness of Stephen Moore and say, "Are you kidding?"  I will be surprised if they do.

Climate denial.  Evolution.  Conspiracy theories about everything under the sun.  On economic policy, it is quite a long way down from Lindsey to Moore, so the degradation of the Republican ecosystem is clearly accelerating.  But the process is not new, and we should not pretend that Trump radically changed the direction of his now-slavish party.  They were headed in this direction all along.


Peter Gerdes said...

It's not obvious to me that merely being a competent economist rather than a brilliant economist is a bad thing in a Fed Governor. Fed Governors have no shortage of brilliant economist's to be advised by (should they desire it) and the skills involved in weighing the evidence for those competing proposals is very different than the kind of brilliance required to advance economic theory. Indeed, it might even be desirable to have someone who knows they are merely competent to choose between that competing advice than someone who is brilliant and will tend to assume their own view is the right one.

Now Lindsey might have been lacking in this skill as well but it wasn't fundamentally unreasonable to appoint someone with that background to the Fed. On the other hand, Stephen Moore doesn't seem to have that basic capacity to understand the arguments being made that is absolutely essential to doing a good job.

David Ricardo said...

One can reasonably sum up the intellectually corrupt economic theory positions of people like Moore as follows.

When a Democrat is in the White House, monetary policy should be restrictive lest the economy expand at a strong rate of growth and the Democrat benefit politically. The cry in this instance is Inflation! Inflation! Inflation!

When a Republican is in the White House monetary policy should be expansionary so that the Republicans can take electoral credit for prosperity.

Basic economics is not just not understood, it is irrelevant.

The joke about Stephen Moore (and yes he is a joke, so pun intended) is that a man walks into a bar and says "Trump just nominated Stephen Moore to the Fed, the man is a hack". A voice from the end of the bar says "I am personally highly offended by that remark". The man says, "Oh sorry, are you Stepen Moore?" The response from the man, "No, I'm a hack".