Trump’s victory offers an opportunity to finally enact some of the reforms needed to rein in the Fed and put a stop to the Fed’s incestuous relationship with the academic economic establishment. Here, Danielle DiMartino Booth, a former advisor to the president of the Federal Reserve Bank of Dallas, calls out some of the problems (there are many more) with the Fed and solutions to improve the institution.
The first thing an engaged Congress can do is prevent future missteps on the Fed’s part.
In November 1977, the Federal Reserve Act was revised to expand the central bank’s mandate to maximize employment in addition to maintaining price stability. No doubt, the debilitating stagflation of the day, manifest in both high inflation and unemployment, suggested that fiscal policy had reached its outer bound in offering relief. Still, some 30 years on, the evidence is clear: Interest rates are the wrong tool to produce both maximum employment and stable prices.
In fact, extraordinarily low interest rates can be counterproductive if they facilitate inaction or worse, and give Congress license to enact legislation that effectively encourages the unemployed to remain outside the workforce. (This was the case with the Obama administration’s expansion of qualifiers for disability insurance, to cite an example.)
Congress should immediately remove the employment maximization mandate that necessarily conflicts with the Fed’s other mandate, the minimization of inflation. The single mandate would ensure that the Fed is less intrusive than it’s been in recent years.
Once the Fed’s mission has been simplified, the real work begins. In a 1993 Reuters interview, Milton Friedman observed that, “The Fed’s relatively enhanced standing among the public has been aided by the fact that Fed has always paid a great deal of attention to soothing the people in the media and buying up its most likely critics.” He explained that the Fed employed half the monetary economists in the U.S. and created visiting appointments for two-thirds of the rest. For Friedman, the risk was that the economics profession would be hard pressed to ever criticize the Fed.
His prescience was remarkable. Today the institution of the Fed is as intellectually entrenched as it has ever been. It has become the largest employer of people with doctorates in economics. It has hired or contracted with more than 1,000 of these economists, who actively endeavor to
validate, rather than question, orthodox theories and policies. The pipeline of talent filling new positions at the Fed is sourced from the same stagnant academic pool that produced the current leadership. Is it any wonder criticism within the Fed has been quashed?
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