The Fed should welcome limits on its responsibilities, and a clear and happy arrangement with Congress.
This might be true in a world where people were focused on implementation of Constitutional principles. But think about what the Fed represents. Do you remember when on health care people were saying that we need something like the Fed for health care?
The Fed represents the idea of experts with esoteric expertise who are independent from Congress. Their exercise of discretionary power is deemed vital for the health of society. The Fed thus represents the ultimate Progressive institution. Rational governance tames the free market. Non-partisan technocrats overcome the flaws in Constitutional democracy.
This mythical Fed is what is threatened by the sorts of laws that Cochrane was asked to testify about.
Don Kohn gives the mainstream response. Pointer from Mark Thoma.
I am skeptical that a Fed that Congress has a much larger role in directing will be more popular with the people who are now so dissatisfied with it.
I often see complaints (sometimes quite justified ones) on sites like this, that Congress lacks lacks many of the insights shared by most professional economists. Seems like you want to have it both ways on this one.
I get that you are seeking what you take to be a more rule based system but once you establish the precedent that Congress should change the rules when it is dissatisfied you will get a system much more influenced by the short term political winds in Congress. Even if the rules don’t actually change, the possibility that they could will make the Fed more easily moved by short term political trends. I don’t think you are seeing all the likely unintended consequences here.
That makes sense from the technocrat’s point of view. From the point of view of an expert working at the Fed, though, bear in mind that having a dense regulatory framework can make things rather cushy.
I’ve encountered this kind of claim from doctors, too, with respect to which interventions are ethical or otherwise meritorious. People in the position of being an expert don’t necessarily want to make hard choices about whether some large intervention is a good idea. That’s especially true for people who got ahead by spending enormous time in school, which I am guessing is the type of personality that ends up in high places at the Fed. People like that develop their careers by studying a lot in school and by doing lots of assignments that are handed to them.
It’s even worse. It wouldn’t even matter if Cochrane got everything he’s asking for, because it wouldn’t survive at precisely the moment of its greatest need.
I mean, at the dawn of the GFC, didn’t we already have a lot of constraints on the Fed and the other players? How’d that work out?
So, the even bigger problem is the unsustainability of any limited scope or constraining rules in a crisis. No public institution has or deserves that kind of “obey the established precommitments, though the heavens fall,” kind of credibility.
It’s frankly kind of bizarre that anyone puts any faith in the constraining power of written rules these days, especially in the last decade, as we lurch from one drama to another where all one observes is the meaninglessness of those purported ‘constraining precommitments’ the minute they become inconvenient.
I think Cochrane is more sophisticated and savvy than that, but that’s hard to reconcile with policy suggestions that rely on the accuracy of that faith.
It’s better just to assume that people in power will always succumb to the siren’s song, and that any public performance of appearing to tie themselves to the mast is being accomplished with wet tissue paper.
I’ve yet to see an argument for Fed independence that could not be adapted, with greater cogency, into an argument for an independent Pentagon. After all, military science is far more precise than the economic kind. Just give the Joint Chiefs of staff a dual mandate, something like “secure defense, international stability, and full spectrum dominance”. (Dual mandates by tradition have three parts; it would take an economist to explain why.) Who could know better when and where to apply force of arms than the best-of-the-best experts on hand in the Pentagon? They’re professionally trained. They have research papers. They have data! Real empirical stuff with low p values. And they’re non-partisan. What’s not to like?
Why not delegate to the Pentagon domestic security as well? It will give them good practice for foreign “police actions.” They will learn to “win hearts and minds” here at home.
Worth restating Pournelle’s Law:
Pournelle’s Iron Law of Bureaucracy states that in any bureaucratic organization there will be two kinds of people. First, there will be those who are devoted to furthering the goals of the organization. Secondly, there will be those dedicated to furthering the organization itself.
The Iron Law states that in every case the second group will gain and keep control of the organization. It will write the rules, and control promotions within the organization.