No Moore golden era for US monetary policy

Jeffrey Frankel 09 May 2019

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Both men whom Donald Trump had intended to nominate to empty seats on the US Federal Reserve Board, Herman Cain and Stephen Moore, have now withdrawn their names.   

Moore and Cain are both considered to be under ethical clouds. They both often get their economic facts wrong. Cynics might respond that they would thereby have fit right in with the roster of Trump nominees throughout the government. But Trump’s earlier appointments to the Fed had been people of ability and integrity and have been doing a good job. 

That Moore and Cain did not have Economics PhDs was not a reason to oppose them. Fed appointees have long included people with real experience in the world of business, for example.

The worry, rather, is that Trump wants to put on the board loyalist cronies who would do whatever Trump wants, instead of what is best for the economy.

Moore pro-cyclicality

Moore has been pro-cyclical in his recommendations for monetary policy – that is, opposing stimulus when the economy needed it and favouring stimulus when the economy did not. First, when the Fed sought to boost the economy in response to the 2007-09 recession, Moore in 2009-10 warned of rising inflation, even hyperinflation. Needless to say, the inflation never materialised.  

As employment rose steadily over the subsequent eight years, one might expect a rational observer’s fears of economic overheating to have increased. The unemployment rate is now below 4 %. Yet Moore switched his assessment and started attacking the Fed for raising interest rates. He recently wrote an op-ed in the Wall Street Journal with titled “The Fed is a threat to growth”.1 In December, he even suggested that Fed Chair Jerome Powell should be fired for raising interest rates.  

If the Fed had followed Moore’s advice, it would have tightened monetary policy in 2010 when unemployment was 9%, prolonging the Great Recession, but loosened monetary policy in 2018, with unemployment below 4%. That cycle of policy would have destabilised the economy.

The most logical explanation is that he switched to urging monetary stimulus when Donald Trump took office. Trump after the 2016 election himself made the same switch in the direction of his attacks on the Fed. One is prompted to ask these people if they turn on the air-conditioning at home in winter and the heat in summer.

It has been hard to miss the swing from Republican agitation for tighter monetary policy a few years ago to their now agitating for easier monetary policy. It fits into a larger pattern of pro-cyclical positions among leading Republicans, not just in monetary policy, but also fiscal and regulatory policy (Frankel 2018).

Some observers, however, treat this swing as a new thing, going against decades of conservatives’ dedication to monetary discipline. The perception that Republicans have been inflation-fighters is longstanding and widespread. But far from being a new thing, pressure from Republicans on the Fed to ease monetary policy when they are in the White House is a pattern that goes back half a century.

Past Republican presidents and the Fed

Republican President Richard Nixon successfully pushed Fed Chairman Arthur Burns into an excessively easy monetary policy in the early 1970s — leading to high inflation which the White House tried to suppress with wage-price controls (Abrams 2006).  Nixon also broke the link with gold in 1971 and devalued the dollar, ending the Bretton Woods era of monetary stability.

Republican Presidents Ronald Reagan and George H.W. Bush both tried aggressively to push Fed Chairmen Paul Volcker and Alan Greenspan into easier monetary policy, especially in election years.  This is documented in Bob Woodward’s (2000) book Maestro.  Some in the Reagan Administration blamed Volcker’s tight monetary policy for the incomplete success of their 1981 supply-side revolution. Reagan made four appointments to the Fed Board in the mid-1980s with the goal of tipping the balance toward easier money.  The culmination came in the form of a short-lived February 1986 ‘palace coup’ in which the Reagan appointees outvoted Chairman Volcker in an attempt to cut the discount rate (Frankel 1994: 328).  

The White House succeeded in making life unpleasant enough for inflation-slayer Volcker that he eventually declined to be reappointed, prompting Treasury Secretary James Baker to exult “We got the son of a bitch!” (Woodward 2000: 24).  Baker is also the man credited with the Plaza Accord and the associated 50% depreciation of the dollar from 1985 to 1987 (Frankel 2016). 

Volcker’s successor was Alan Greenspan.  George H.W. Bush complained that Greenspan failed to ease monetary policy sufficiently in 1990-91 and blamed him for costing him re-election in 1992 (Harris 2008: 44).

Have the Democrats done it too?

Surely Republicans are not alone in wanting lower interest rates when they are in the White House? Surely “everybody does it.” Actually, no.  Each of the three Democrats to serve as president in the last 50 years refrained from pushing the Fed to ease monetary policy. Jimmy Carter is the one who originally appointed Volcker as Fed Chairman in 1979, with a mandate to conquer inflation even at the cost of recession and reduced chances of re-election in 1980.   The administration of Bill Clinton, for its part, scrupulously abstained from commenting on US monetary policy at all (Mankiw 2004). The same with Barack Obama, further reinforcing the norm of Fed independence. Trump is blowing up all such norms.

The gold standard versus a commodity standard

A century ago, the gold standard was considered a guarantor of monetary stability.  That golden era is long-gone, if it ever really existed at all.

Moore and Cain had both said that they favour a return to gold.  Judy Shelton, the US Executive Director at the European Bank for Reconstruction and Development who is rumored a candidate to be Trump’s next choice for the Fed, is a long-time serious and consistent adherent of a return to the gold standard.  (She does have a PhD.)

In true Trumpian fashion, Moore last month denied having said he favoured the gold standard, despite the clear video evidence.  In any case, he now says he favours having monetary policy focus on a basket of commodities, not just gold alone.  This has brought him some ridicule.  It is true, however, that a price index based on a variety of commodities would attenuate the volatility of the gold market.  There was a time in the 1930s – after FDR took the US off of gold (Eichengreen 1992, Edwards, 2018) – when leading experts Benjamin Graham (1937) and John Maynard Keynes (1938) weighed the advantages of a hypothetical commodity basket standard.  

In the case of a country that specialises in exports of mineral or other commodities, one can make an argument for targeting a price index of those export commodities, as an alternative to the option of targeting the CPI (Frankel 2011).  Proposing a commodity price target for the US, would be foolish.  But commodity prices are sensitive to real interest rates (Frankel 2014), and so one could make a case for including them alongside stock prices and the exchange rate in a Financial Conditions Index. Real commodity price indices correctly reflect that US monetary policy began tightening in 2013-14, while still remaining loose today by historical standards.

In the late 1970s, the supply-siders who hitched themselves to Ronald Reagan’s 1980 candidacy famously campaigned for large tax cuts (which, they said, would pay for themselves). But they also tended to have a particular view on monetary policy: that the US should consider returning to the gold standard. The movement achieved the creation of a high-level official Gold Commission, but lost some momentum after it submitted its report in 1982.

In the 1980s, supply-siders like Congressman Jack Kemp continued to campaign for a return to the gold standard, arguing that this would allow an easier monetary policy, which they thought was the only thing holding back the success of the supply-side strategy. (The price of gold declined in 1981-1984, coming off a record high in 1980.  Thus, it was a time when stabilising the price of gold might indeed have implied an easier monetary policy.)  It was noted then, as now, that to have small-government populists arguing in favour of the gold standard stood on its head the history of American populism. That history was memorably represented by William Jennings Bryan’s campaign for the presidency during the deflationary 1890s, on a platform declaring that farmers and workers would refuse to be “crucified on a cross of gold”.

On this, Bryan was ahead of his time. The crude handcuffs of a standard based on gold or other mineral commodities may have played a useful role in preventing chronic inflation in the 19th century. But that era is no more. The Fed in recent years has shown that it can do better on its own, with competent appointees working under the protection of institutional independence.  

Author’s note: A shorter version of this column appeared in Project Syndicate on 27 April 2019 containing links to media documentation.

References

Abrams, B (2006) “How Richard Nixon Pressured Arthur Burns: Evidence from the Nixon Tapes,” Journal of Economic Perspectives 20( 4): 177-188. 

Edwards, S (2018), American Default: The Untold Story of FDR, the Supreme Court and the Battle over Gold, Princeton University Press.

Eichengreen, B (1992), Golden Fetters: The Gold Standard and the Great Depression, 1919-1939, Oxford University Press.

Fleming, S (2019), “Republicans pivot towards easier money”,  Financial Times, 12 April.

Frankel, J (1986), “Overshooting, agricultural commodity markets, and public policy: Discussion,” American Journal of Agricultural Economics  68(2): 418-19.  

Frankel, J (1994), “The Making of Exchange Rate Policy in the 1980s,” in M Feldstein (ed.), American Economic Policy in the 1980s, University of Chicago Press, pp. 293-341.

Frankel, J (2007), “Responding to Crises,” Cato Journal 27( 2).

Frankel, J (2011), “A Comparison of Product Price Targeting and Other Monetary Anchor Options, for Commodity-Exporters in Latin America,"   Economia 11(2).

Frankel, J (2014), "Effects of Speculation and Interest Rates in a “Carry Trade” Model of Commodity Prices," Journal of International Money and Finance 42:. 88-112. 

Frankel, J (2016), "The Plaza Accord, 30 Years Later,” in C F Bergsten and R Green (eds), Currency Policy Then and Now: 30th Anniversary of the Plaza Accord, Peterson Institute for International Economics. 

Frankel, J (2018), “US will lack fiscal space to respond when next recession comesThe Guardian, 28 August. 

Graham, B (1937), Storage and Stability, McGraw Hill. 

Harris, E (2008), Ben Bernanke's Fed: The Federal Reserve After Greenspan, Harvard Business Press.

Kemp, J (1984), “Lower Interest Rates and Economic Growth by Restoring a Golden Rule,” 130 Congressional Record 20314-20317, 29 June.

Keynes, J M (1938), “The Policy of Government Storage of Foodstuffs and Raw Materials.” Economic Journal 48 (September): 449–60.

Mankiw, G (2002), “US Monetary Policy During the 1990s,” in J Frankeland P Orszag (eds), American Economic Policy in the 1990s, MIT Press.

Woodward, B (2000), Maestro, Simons and Shuster.

Endnotes

[1] https://www.wsj.com/articles/the-fed-is-a-threat-to-growth-11552518464

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Topics:  Monetary policy

Tags:  monetary policy, Republicans, Trump, Federal Reserve Board, gold standard

Economist and Professor, Harvard Kennedy School

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