Democrats should join, not boycott, the ‘Monetary Policy Olympics’

On July 29, the House Financial Services Committee met to vote on, among other bills, the Brady-Cornyn Centennial Monetary Commission Act, HR 2912.  This would charter a commission to make an empirical study of Fed policies and job creation, income mobility, economic growth, and other real world outcomes. The legislation passed committee along largely partisan lines. 

Sound boring?  It’s not. Monetary policy, like the Great Moderation, is one of the key drivers of job creation.  And the commission, if enacted, will be the “Monetary Policy Olympics.”

Every Republican present voted aye.  Every Democrat voted nay, save Rep. John Delaney (D-Md.), an aye.  The Democrats’ vote presented a curious contrast to the hearty bi-partisan House support for the more stringent “Audit the Fed” legislation which passed the 113th Congress with majority Democratic support.  Delaney, by far the most distinguished, and accomplished, financial thinker in the House Democratic conference, was not committing political heresy. 

The Democrats, except Delaney, now appear bipolar on the matter of the Fed. Over a hundred Democrats last year voted to audit the Fed.  Yet the Democratic conference proves resistant to the enactment of this commission, one far less intrusive to the Fed. So what are their stated objections? 

Democrats have voiced three main objections.  Some have expressed concern that a commission would undermine the Fed’s independence. Several have expressed concern that the commission reflects the composition of Congress, providing more GOP than Democratic commissioners.  Others have said that the Fed is doing a good job and should be left alone.  These are implausible objections.  They deserve consideration, then reconsideration.   

Independence does not equal impunity.  Hoover Institute’s Dr. John Cochrane, testifying recently before a hearing of the House subcommittee on Monetary Policy and Trade, put it best: “the more an agency follows rules, the more limited its powers, the more independent it can be.” 

The objection to the commission’s composition is, at best, disingenuous.  The version of the commission in the 113th Congress had six Democratic and six Republican commissioners.  Despite wide exposure, and warm invitation to engage, the Democratic conference then yielded only Delaney as a co-sponsor.  

As for how the Fed really is doing, if discretionary monetary policy really is better, an empirical assessment will demonstrate that. Could Democrats be boycotting from a feeling of insecurity as to the merits of their claim that the Fed now is performing optimally? 

Paul Volcker, generally considered the greatest Fed chair in modern history, observed in a speech before the annual meeting of the Bretton Woods Committee last year:

By now I think we can agree that the absence of an official, rules-based cooperatively managed, monetary system has not been a great success. In fact, international financial crises seem at least as frequent and more destructive in impeding economic stability and growth.  The United States, in particular, had in the 1970’s an unhappy decade of inflation ending in stagflation. … Less than a decade later, it was capped by the financial crisis of the 2007-2009 period and the great Recession. Not a pretty picture. 

The commission is designed to be strictly empirical. It is to be an authoritative body before which America’s top monetary experts, along with representatives of finance, business, labor, and other stakeholders, publicly can present their views and have them considered.  The commission then will send a report to Congress in December 2016.   

Partisanship in the report would be utterly counterproductive.

It is sure to receive intense attention, and scrutiny.  It will need ironclad intellectual integrity if it is not to end up a dead letter.   

There is another element that ensures fair treatment of Democratic views.  Republicans generally agree that a rule-based monetary policy is essential to job creation and economic growth. Despite general agreement there are widely differing prescriptions of what rule would be optimal.  None of the proponents has an inside track.   

The commission really does offer all, including proponents of Fed discretion, a level playing field.  Let proponents of discretion compete with proponents of the Taylor Rule, NGDP targeting, the gold standard and other views.  The Fed certainly will provide the Democrats oceans of data and reams of analysis.   

A Democratic balk betrays a lack of confidence in their case. Democrats, if you believe in your own cause, embrace the Commission. Compete in, don’t boycott, the Monetary Policy Olympics.  Let’s see what you’ve got. And may the best monetary policy — and America — win!

Benko is a senior economic adviser to American Principles in Action


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