More Populism Might Have Produced a Better Fed Chair
As I noted in my reaction to reports of Jerome Powell’s nomination, Trump’s endorsement was a significant defeat for the growing movement among Hill Republicans to force the Fed to adopt “rules-based monetary policy.” Since I’ve already written on why I think such reform plans would largely fail to achieve their desired ends, I’m not particularly bothered by the defeat — but I do think there is a lesson to be gained here on libertarian strategy.
As Jeff Deist noted at the Mises Institute’s 35th Anniversary, along with some genuine disagreements regarding economics and political theory, Murray Rothbard and F.A. Hayek held very different opinions on the best strategy going forward to promote liberty. While both agreed, following Mises’s insights, that winning “hearts and minds” was absolutely essential to a free society — government would not be limited by pursuing and tricking the populist into something it wasn’t prepare to adopt — they disagreed on the best way of accomplishing this task.
While Rothbard favored a libertarian-populist strategy aimed at educating and energizing laypeople, Hayek thought it was best to influence academics and intellectuals, what he termed “second hand dealers of ideas.” A more classically liberal intelligentsia would influence policymakers and from that good — or at least better — public policy would follow.
While it may be a step too far to suggest that this approach can never lead to any form of substantial policy victory in Washington — and certainly no intellectual movement should be limited to a single strategy — Trump’s nomination of Powell I think does highlight one of the major flaws with Hayek’s strategy.
After all, in theory all the pieces were being moved in place. The financial crisis of 2008 forced the economic profession to seriously re-evaluate the orthodoxy of monetary policy. While the reaction of then-Chairman Ben Bernanke and his predecessors has been to enhance the power of America’s central bank and push the country — and by extension the world — into truly unprecedented territory, academics around the world re-evaluated monetary policy at a more fundamental level.
While international re-examination of economics has been to the advantage of the Austrian school, it’s not surprising it also created opportunity for other heterodox schools of thought. One example, Modern Monetary Theory, has benefited greatly from the increased attention payed to Dr. Scott Sumner and his blog, the Money Illusion.
Sumner's work, along with the endorsement of major economic figures like Christina Romer, pushed the idea of central bank NGDP-targeting into mainstream conversation. Eventually this showed itself beyond blog posts and opinion pages, leading DC-based think tanks to become advocates themselves — which has led to numerous policy briefings, conferences, and less-official lobbying in an attempt to win over actual decision makers. Not only has this led to Scott Sumner securing a position with the Mercatus Center, but other established organizations — such as the Cato Institute and Brookings — have joined the cause. Since NGDP Targeting is itself simply a form of a monetary policy rule, we can even add in the influential Heritage Foundation to the number of proud beltway institutions championing this sort of Fed reform.
As mentioned before, this has led to some very real converts on the Hill. Not only has Jeb Hensarling, chairman of the House Financial Services Committee, been a constant advocate for rules-based monetary policy, but prior to Powell’s nomination, Senate Republicans made it clear that their choice was John B. Taylor — himself the author of his own monetary rule. Considering his relationship with Hensarling and others, there is also reason to believe that Vice President Mike Pence would himself have been another voice in the Oval Office advocating for a break with the monetary status quo.
So why did Trump, perhaps the most vocal central bank critic elected to the White House since Andrew Jackson, end up picking an Obama-nominated Federal Reserve governor? Simple, it was always in his best interest.
After all, while it is not unfair to question Trump’s mastery of the finer detail of public policy, the Fed was one issue in which he didn’t only show good populist instincts, but a strong grasp of the true consequence of policy. This isn’t all that surprising for a man with his history in real estate. He was right when he called the stock market a “big fat bubble,” and blasted the Fed for being “more political than Hillary Clinton” by propping up Obama’s weak economy.
Now, however, it is his big fat bubble. As president, he is the one that needs to keep the party going — even if it means keeping the swamp wet. It’s always easier to advocate rocking the boat safely from the shore than it is from the inside.
For those that enjoy counterfactual history, it’s interesting to think what would have happened if Ted Cruz — with his own flirtation of NGDP targeting — would have won the Republican nomination. Perhaps, in that scenario, the Hayek strategy would have paid off. Who knows?
What we do know is that while Ron Paul’s populist strategy has also failed to make a real change to monetary policy, it has made gains elsewhere. Just recently Alabama’s state legislators have introduced legislation to have the state follow the lead of Arizona, Texas, and several others in taking efforts to legalize gold and silver as currency. While it would be great if a certain senator from Kentucky would follow his father’s lead in promoting currency competition at a federal level, the continuing gains being made at the state level are simply another reminder that there is more than one way to change policy in America.