[This post is a response to Paul Krugman’s post on “The Fed Puzzle” at the New York Times].
The question I sought to raise in my post on Krugman’s article from last week is indeed what explains Federal Reserve behavior. It was not to disagree with Krugman’s policy views. I read him regularly and follow his opinions: I defer to his vastly superior knowledge of economics, perhaps because I largely agree with his priorities. My complaint is not addressed at his economics (his account of what should be done), but with his explanations of why some policies are chosen over others.
When I read economists writing for the public – or talk to friends who are economists – they tell me which policy is recommended by economic theory, but usually don’t tell me why economic-decision makers adopt whatever policy they do adopt. They say that explaining decisions isn’t their domain. In contrast, in his column, Krugman looks at Fed decision-making, and frames the question as one of explaining the disagreement between two groups of experts with similar training – those outside the Fed and some of those inside. Krugman deserves applause for providing more specific arguments than his many columns that talk about “Very Serious People,” and for raising good arguments about how the Fed’s decisions can be affected by bankers networks and regulators’ interests in getting a nice job after leaving office. These are both relevant and interesting.
But there is much more happening than dynamics among experts. For starters, there is Congress, the president, elections, interest groups. The notion that the Fed and other central banks are truly independent does not bear up to the evidence. Krugman’s notion of the puzzle is thus too narrow. He is essentially arguing to Janet Yellen, “You and I had the same training. How can you not see what is right?”
This is the argument I wish to poke at: It assumes all that matters is your training and your brains. Yellen has to run a committee whose members don’t agree with each other, or with her. She has to deal with Congress, which can threaten the Fed’s powers, budget and mandate, sniping at her all the time, and has to give testimony to Congress in order to justify the Fed’s actions. She has the president, interest groups, the news media, elections and all such things to consider.
Why would we imagine she should behave as if she were in a Cambridge classroom looking at the facts and coming out with an answer?
It’s not just that bankers talk to each other and regulators worry about their next job. It’s that central bankers are political actors, in a political system, trying to forge the compromises that will allow them to do a fundamentally political job.
[Bailing out banks is not a lucrative business]
Many social scientists would agree with this complaint – that we need a proper political explanation or some other explanation of Fed behavior outside the world of economic theory.
More broadly, and more contentiously, one might push back at the notion that all that matters therefore is an analysis of the facts and the correct theory. That certainly matters, but we live in a world of fundamental uncertainty. Thus, there are many judgment calls, where the facts are ambiguous or unhelpful.
Values – and not just smarts and theory — help shape how you come down on uncertainty.
Several of my friends note that Krugman is outstanding among economists in his willingness and ability to raise political and other non-economic variables. I wholeheartedly agree. He is also the most widely read economics columnist in the United States, and hence the most relevant person to engage in dialogue with these issues.
It is precisely because I agree with him on so many things, that I challenge what I see as the narrowness of his political accounts.
The fundamental point is that the Federal Reserve is not a seminar. It is not only about being “serious” or “smart” or “finding the right theory” or getting the data right. It is about a political game of balancing between multiple forces of pressure: the people inside the Fed Committee; Congress and the president, who make appointments and set budget and powers; political parties aggregating various ideas and interests to capture political office; interest groups who lobby hard one way or another; the media which helps or hurts one side or another, markets which respond with their various forms of power, foreign governments and countries.
Krugman knows all of that, but rarely notes it. I read him regularly and would guess his ideas about this broader context enter his columns perhaps once every six months, while explanations focused on the device of Very Serious People appear far more frequently.
For those who are interested, here are some references to work on politics and the Fed, and related themes of politics and economic policy:
William Roberts Clark, Vincent Arel-Bundock. 2013. “Independent but not Indifferent: Partisan Bias in Monetary Policy at the Fed.” Economics & Politics 25, 1 (March):1-26.
Lawrence Broz, The Federal Reserve’s Coalition in Congress. Broz looks at roll calls in Congress to explore left and right influences on the Fed.
Chris Adolph, Bankers, Bureaucrats and Central Bank Policy: the myth of neutrality, Cambridge University Press 2013
John T. Woolley. Monetary Politics. The Federal Reserve and the Politics of Monetary Policy. 1986. This book analyzed the relationships between the Federal Reserve and the president, Congress, bankers, and economists. Far from being politically independent, the Federal Reserve is shown to be sensitive to a wide range of political influences.
Thomas Havrilesky. The Pressures on American Monetary Policy. Kluwer 1993. This book investigates how interest groups work through the President, Congress and other avenues .
Cornelia Woll, The Power of Inaction.
Kelly H. Chang. Appointing Central Bankers: The Politics of Monetary Policy in the United States. Cambridge UP 2003. This book looks at influence on the appointment system.
Jeff Frieden, Currency Politics: The Political Economy of Exchange Rate PolicyDec 28, 2014.. (this is not about the Fed but more broadly about currency policy).
Roger Lowenstein, America’s Bank: The Epic Struggle to Create the Federal Reserve (suggested by Jeff Frieden).
Two well known excellent books that situate these issues in a political context are Bob Kuttner’s Debtors’ Prison and Mark Blyth, Austerity.
Paul Pierson and Jacob Hacker have a new book coming out following their fine work so far. American Amnesia: Rediscovering the Forgotten Roots of Prosperity.
Some interesting writing from people in Sociology Departments:
Greta R. Krippner, Capitalizing on Crisis: The Political Origins of the Rise of Finance
Marion Fourcade, Economists and Societies: Discipline and Profession in the United States, Britain, and France, 1890s to 1990s; 2015, “The Superiority of Economists” (with Etienne Ollion and Yann Algan), Journal of Economic Perspectives; 2013 “Moral Categories in the Financial Crisis.” “Introduction” (with Cornelia Woll) and “The Economy as Morality Play” Socio-Economic Review 11: 601-627.