What Would a Strong Liberal Federal Reserve Member Look Like?

With Kevin Wash leaving the Federal Reserve it is a great time for progressives to organize around nominating a strong liberal candidate to the Federal Reserve. But what would a candidate look like?   If we had to create our ideal candidate, what characteristics would he or she have?

Matt Yglesias just gave this a shot.  His suggestions:

— Real specialization in monetary economics capable of swaying the non-specialists on the FOMC.
— A commitment to monetary stimulus, none of this “structural” hand-waving.
— A skeptical view of the merits of a large and profitable financial services sector.
— A generally progressive & egalitarian outlook.

That’s all great stuff. What else?  I’m still thinking this through and I could use your opinions.  Here are some ways to approach it to continue the discussion:

Left/Right Symmetry We know what conservative picks to the Federal Reserve look like.  They are usually business executives from regional banks, who see structural unemployment everywhere they look, who have always and everywhere worried about inflation above anything else, and who care little about the costs of unemployment and workers and everything about business interests.   Can we just do the opposite of that?  The left-wing/right-wing symmetry isn’t a great conceptual framework for most problems, as the left and the right have different starting points, goals, forms of arguments and expertise, etc.   But maybe that would work here?

Financial System One characteristic of the Greenspan-era was a deferential attitude towards the financial sector and a hostility to regulations, even to the point of enforcing existing regulations.   So someone who is more skeptical of the financial sector is going to be a better candidate.  Two reasons:  (1)  Supporters of Dodd-Frank reforms, particularly the CFPB, are going to be necessary inside the FOMC for this to actually be implemented well and (2) we need less emphasis on providing monetary support through the broken financial sector and more effort to get demand closer to actual consumers, and someone without a huge pro-Wall Street bias going into the committee will help with that.

On Target Or Off Target I’ve noticed a lot of liberal bloggers engaging with Federal Reserve targeting rules to get out of this recession, coming out of arguments related to ones proposed by Scott Sumner.   One appeal of this argument is that it is similar to saying “Even if the Federal Reserve didn’t care about unemployment and just price stability, it would do  QEII and other drastic measures.”  But should our ideal Fed candidate support inflation targeting?  I actually thought inflation targeting was a way for our Fed to get around a dual mandate without going to Congress, to be indifferent to unemployment and raise interest rates at even the slightest hint of inflation, which goes against the basic conceptual outline here.

I’ve asked a few left-of-center economist friends about this and have gotten wildly different answers.   Part of it depends on whether or not there would be a higher inflation target than normal.  Which leads to…

The Great Moderation, In Hindsight Chris Hayes wrote a great (and not cited enough) piece for New America, Overcoming America’s Debt Overhang: The Case for Inflation, that I think is relevant here:

More importantly, as we have learned from the past decade and half, an economy with inflation that is too low can produce perverse incentives: it stokes the financial economy at the cost of the real economy, and it can be a reflection (as Alan Greenspan once frankly admitted) of a working class suffering from stagnating wages and thus of an economy with insufficient aggregate demand. The boom years of low inflation saw a dramatic decrease in the prices of many household consumer goods from electronic equipment to clothing to food. This was partly due to the outsourcing of production to low-wage developing countries and partly due to rapid productivity gains in manufacturing. But those same dynamics also helped create massive global trade imbalances, and the profits captured by firms poured into capital markets, lowering interest rates and increasing the ravenous search for yield and the taking on ever more risk….

We are, in many ways, now reaping what decades of historically low inflation have sown: a massive upwards redistribution of wealth, an oversized financial sector, an eviscerated tradable goods sector, and a grotesquely large trade deficit. In other words, the imbalances and structural weaknesses of the post-Volcker economy, the ones that built up to create the crisis, were partly produced by the Great Disinflation that Volcker ushered in. Recovery will involve a fundamental restructuring of our economic engine, shifting from the supply-side nostrums of the past two decades that paradoxically led to an unhealthy pattern of asset bubbles and debt-financed consumption to policies that bolster global demand by investing in quality-of-life improvements and by raising incomes and wages worldwide. That means the seeding of a global middle class and recalibrating the share of profits captured by labor as opposed to capital. Such an economy will almost certainly be an economy with higher inflation than has been the case over the past two decades.

Should our candidate think that something went fundamentally wrong at the end of the Great Moderation?   Should he or she seek higher inflation than what we’ve seen over the past 30 years as a new goal?  Did the Greenspan Put era simply give us a leveraged-induced financialized growth susceptible to wild swings through balance sheet mechanisms, a growth that benefitted financial intermediaries, pushed inequality up, generated trade imbalances and left workers the last to benefit?  Do we need to do something much different than the Greenspan-era, or just a little-bit different?

I’m not sure.  I’d very much appreciate feedback on this.

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10 Responses to What Would a Strong Liberal Federal Reserve Member Look Like?

  1. Petey says:

    “Should he or she seek higher inflation than what we’ve seen over the past 30 years as a new goal?”

    I think we could obvious use some moderately higher inflation over the next 5 to 10 years.

    But I think that is an extraordinary measure for extraordinary times.

    In more normal times, I don’t think there is any rational basis for thinking higher inflation is good for either the median citizen, or the poor citizen.

  2. Frank says:

    I like Tim Canova’s view:
    http://www.prospect.org/cs/articles?article=the_federal_reserve_we_need

    “How different is the current reality from the 1942-1951 Federal Reserve, which provides a model of what a democratically accountable central bank would look like when working with elected branches to achieve the three primary objectives of Keynesian economics: maintaining genuine full employment; reducing the tremendous inequalities in wealth and income that undermine any sustainable recovery; and putting an end to the monopolistic structures and financial practices that harm taxpayers and consumers alike. “

  3. Josh says:

    is the monetary policy part the key or is the possibility of increasing/improving bank and non-bank lending operations?

  4. jest says:

    I’m a bit shocked that a labor or trade economist hasn’t been brought up in the discussion. Both sectors have been critical to the hollowing out of the middle class.

    Given the dual mandate, you would think they would at least give labor lip service, but I
    guess that is asking too much these days.

    Frankly, the whole notion that inflation fighting solves all problems was part & parcel of the failure of the Great Moderation. I’d like to see someone who is critical of all three ideas.

    But this will never happen, as all economists take the above neo-liberalisms as a subconscious, immutable given (you succumb to this too, Mike, as does Krugman, for that matter) which I find horrifyingly depressing.

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  6. Jason Ward says:

    Mike, I second much of what is in Timothy Canova’s American Prospect article. A couple of other perspectives I found very enlightening recently were Steve Randy Waldman’s assertion from a 2009 Interfluidity

    http://www.interfluidity.com/posts/1256656346.shtml (THIS IS GREAT ANALYSIS)

    that the Fed favors asset price inflation (aka bubbles) from non-wage spending (or “saving” take your pic), over commodity price inflation from wage spending and that much of policy since the 80s has been about substituting access to credit for increases in wages because that is a spending parameter central bankers can affect easily, hence it is the favored balance. I think there’s much truth to this insight, but the idea that central bankers can put their preferred genie back in the bottle is very much in dispute within the reality-based community now, as well it should be. Someone who can admit to this reality would be a welcome addition to the Fed. In other words, someone who sees clearly the limit to monetary tools and can admit when it’s time for a handoff to other means. Also someone who treats the potential value of modest inflation as seriously as the dangers of “immodest” inflation (whatever that means today).

    Finally, I would point readers to a Beardsley Ruml (Fed Governor at the end of WWII) speech from 1946 where, realizing that the reality of a floating-rate fiat currency system was freedom from revenue constraints on US govt. spending (this was before Bretton Woods was in place, and can perhaps be cited as a birth pang of MMT), and in such a case as this, responsible policy questions for economic policy would be:

    Do we want a dollar with reasonably stable purchasing power over the years?

    Do we want greater equality of wealth and of income than would result from economic forces working alone?

    Do we want to subsidize certain industries and certain economic groups?

    Do we want the beneficiaries of certain federal activities to be aware of what they cost?

    The whole speech is here:
    http://home.hiwaay.net/~becraft/RUMLTAXES.html

    Keep in mind that people like Ruml and Mariner Eccles were positively centrist in their day. It is sad that these are people that in today’s climate would qualify as liberal or progressive, but that’s the ship we’re sinking in. I think the previous commenter’s suggestion that a labor economist should have a voice on the board would probably serve to put much of this sort of debate into the proceedings.

    Thanks for your great analysis. Keep it up!
    Jason Ward

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  8. sraffa says:

    This is a good question:

    First, an explicit commitment to a Taylor Rule would be useful. A more liberal Fed appointee would push for more important place on unemployment(output gap) and less on inflation in terms of interest rate setting. The current thinking is 50-50 is best, but maybe 60-40 is preferable? This would force unemployment doves that want to change the Taylor Rule would be using discretion, and not commitments, which is verboten in modern monetary thinking. Definitely no inflation targeting- that’s a defeat.

    Raising the inflation rate would raise nominal interest rates like the fed funds rate. This would put you farther from the zero bound and give monetary policy more breathing room, as the nominal interest rate is farther from zero before the crisis hits, but 4% inflation is still low inflation.

    So I’d say a a commitment to a Taylor rule like the following (in percent):

    fed funds= current inflation+2%[real interest rate]+0.4*(4-current inflation)+0.6*(output gap)

    Here you’d still get a monetary policy rule that is credible and controls inflation, but one that cares more about the the unemployed that the current framework.

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