"The Semantics of Fed Independence"

On Fed independence:

Perspectives on Federal Reserve Independence—A Changing Structure for Changing Times, by Bruce K. Mac Laury, FRB Minneapolis: ...The Semantics of Fed Independence Quite probably the term “independence” has been over-used. It was a key concept in the design of our central banking system—but in a relative sense, not as an absolute.

What does “independence” mean? Is the Federal Reserve accountable? Is it responsive to changing national priorities?

First, let's be clear on what independence does not mean.

It does not mean decisions and actions made without accountability. By law and by established procedures, the System is clearly accountable to congress—not only for its monetary policy actions, but also for its regulatory responsibilities and for services to banks and to the public.

Nor does independence mean that monetary policy actions should be free from public discussion and criticism—by members of congress, by professional economists in and out of government, by financial, business, and community leaders, and by informed citizens.

Nor does it mean that the Fed is independent of the government. Although closely interfaced with commercial banking, the Fed is clearly a public institution, functioning within a discipline of responsibility to the “public-interest.” It has a degree of independence within the government—which is quite different from being independent of government.

Thus, the Federal Reserve System is more appropriately thought of as being “insulated” from, rather than independent of, political—government and banking—special interest pressures. Through their 14-year terms and staggered appointments, for example, members of the Board of Governors are insulated from being dependent on or beholden to the current administration or party in power. In this and in other ways, then, the monetary process is insulated—but not isolated—from these influences.

In a functional sense, the insulated structure enables monetary policy makers to look beyond short-term pressures and political expedients whenever the long-term goals of sustainable growth and stable prices may require “unpopular” policy actions. Monetary judgments must be able to weigh as objectively as possible the merit of short-term expedients against long-term consequences—in the on-going public interest.

There's evidence to support the view that 'insulation" leads to better economic outcomes, and I think we should be very careful about compromising the Fed's ability to act independently of the rest of government.

Comments

[esb]

I am with you on this one one hundred percent.

One hundred percent.

[James Kroeger]

There's evidence to support the view that 'insulation" leads to better economic outcomes...

Actually, Mark, the 'evidence' you cite only leads to lower recorded inflation levels, not 'better economic outcomes.'

In order for you to make your statement, you need to assume that 'lower inflation' is always a better economic outcome than 'higher inflation' and that simply is not true. Inflation is never lower than when an economy is mired in a depression and that is not a better outcome by any stretch of the imagination, but yet your interpretation of the chart you provide would assert with equal conviction that any country suffering through an economic depression would be enjoying a better economic outcome.

BTW, I have not yet heard you comment on the empirical evidence that Gerald Epstein (UMASS) cites when he asserts that "...moderate rates of inflation, inflation up to 20% or more, has no predictable negative consequences on the real economy: it is not associated with slower growth, reduced investment, less foreign direct investment, or any other important real variable that one can find..."

Doesn't his evidence appear to flatly contradict the position you are defending, Mark? Do you believe that his research is flawed?

Do you think you will ever be able to concede the point that I frequently make that generally speaking consumers suffer no loss of purchasing power in economies that are experiencing 'moderate rates of inflation' like those Epstein studied? Yes, prices are increasing more rapidly than normal, but incomes are also increasing enough to cover those higher prices, or else the higher prices would not hold in the marketplace.

Have you ever really given this subject much consideration?

[Bruce Wilder]

inflation? Did someone say inflation?

Crude is over $80 a barrel, wheat is over $8 a bushel, the Euro is over a $1.40 and the Canadian dollar is at parity. But, hey, why worry?

[Brenda Rosser]

Gerald Epstein (UMASS) cites when he asserts that "...moderate rates of inflation, inflation up to 20% or more, has no predictable negative consequences on the real economy: it is not associated with slower growth, reduced investment, less foreign direct investment, or any other important real variable that one can find..."

As long as we don't look at our planet now on the brink of ecological collapse. Epstein's 'inflation' assumes the SAME amount of real wealth in the context of a greater production in the units of currency.

"..economists appear to have largely overlooked the fact that a corporate owner of property rights in a biological resource might actually prefer extermination to conservation, on the basis of maximisation of profits."
Colin W Clark

"in the economics of exhaustible resources, most potential buyers cannot come to the market"

Podolinksy: "ultimate limits to economic growth lay - not in the shackles of the relations of production - but in physical and ecological laws."