Over the past few years the American people have watched helplessly as their formerly respected national institutions sank into one sordid mess after another. First it was the IRS, then the VA, then the Secret Service, then the CDC, and now the Fed. What in the world’s going on?
I can’t really put my finger on a common denominator that explains the decline of these organizations, except to note that in almost every case there were two factors involved: (1) individuals in high places in the bureaucracies decided that their own short-term opinions and interests were more important than the long-term interests of the organizations, and (2) moral leadership was lacking at the top.
* In the case of the IRS, Lois Lerner decided she didn’t like the Tea Party. Well, that’s a very large crowd, but most people believe the Tea Party is entitled to make its case and that the American people are sensible enough to reject most of it. But Lerner felt otherwise – she would corrupt the power of the IRS to carry out her personal vendetta.
* The VA, it turns out, was corrupt almost from top to bottom. The folks at the top set impossible goals, then turned a blind eye as the folks at the bottom compromised veterans’ care in order to meet their quotas.
* The Secret Service has been on a long, slow slide toward the muck, as apathetic leadership at the top combined with a job that is simultaneously critically important and inexpressibly boring. The results were predictable: agents who set out to enjoy themselves or fall asleep on the job because that’s what they wanted to do and, anyway, no one cared.
* The CDC is a bit of a special case. The leadership at the top had the personal opinion that Ebola was nothing more than a media frenzy. The result of this opinion was that one man died, several nurses became violently ill, and the “media frenzy” quickly morphed into wild national hysteria. Nice job, CDC.
But let’s turn to the subject at hand: the potentially catastrophic politicization of the Federal Reserve at the hands of Janet Yellen. When Yellen was nominated, it was no surprise that a left-of-center President would seek out a left-of-center Fed Chair. The President, after all, is entitled to nominate anyone he wants, and he wanted someone who was ideologically simpatico.
Yellen is a kind of throwback – an unreconstructed Keynesian who has spent her entire adult life inside the walls of academia and who, therefore, having no experience of the real world of commerce, doesn’t understand it. She actually believes that bureaucrats are smarter than markets. She believes, for example, that market economies can’t operate without routine intervention by bureaucrats and that those bureaucrats have better knowledge and insight than the invisible hand of the market. She seems not to have noticed that the Phillips Curve was discredited long ago, and by an economist who won the Nobel Prize in part for that very work.(1)
But so what, really? The Chair of the Fed isn’t in office to grind his or her own axe. Yellen is there to make sensible decisions and to build consensus among the voting members of the Open Market Committee.
How utterly bizarre, then, to wake up every other morning to see on the front pages of American newspapers the Chair of the Fed conducting herself like a common pol running for office. She meets with job seekers, showing how caring she is. She stakes out ideological positions and speaks out about them. Just a week or so ago, there she was, meeting with job seekers in Boston, looking in the photos like a deer caught in the headlights. But she got her picture on the front pages.
This sort of political showboating was followed (the very next day) by Yellen’s speech on the subject of that most hilarious of contemporary canards, “inequality.”(2) We can all have our own opinions about the inequality issue, but let’s face facts: it’s a Democratic partisan argument that the Chair of the Fed should keep her mouth shut about.
The problem isn’t that Yellen is wrong – she might be or she might not be. The problem is that once the Fed has been politicized it’s a very long way to the bottom. In a few days the Republican Party is likely to take control of both houses of Congress, and they aren’t going to sit idly by while Yellen spouts Democratic Party ideology. What will happen to the Fed’s mandate, to its vaunted independence, once it’s become soiled by partisan politics?
In a few years time, people will look back at our own era as one characterized by extreme hubris on the part of our economic bureaucrats. But, by then, will there even be a Fed?
(1) Keynesian economics held that there was a nearly perfect inverse relationship between unemployment and inflation (the “Phillips Curve”), and, therefore, that intervention in markets to drive up inflation would reduce unemployment. This idea was thoroughly discredited by Milton Friedman, who demonstrated that it held only in the very short-term and was irrelevant in the longer term.
(2) Ever since the hapless Monsieur Thomas Piketty – him of the instantly discredited research – raised the inequality issue it has been used to explain everything. Just recently, I read, in the New York Times, that Americans were not saving enough because, of course, inequality meant that the rich were soaking up all the income and there wasn’t anything left for the middle class. Not two weeks later I read, in Bloomberg, that savings rates in America were ticking up, but that this was due to inequality, since all the savings were obviously being socked away by the rich.
Next up: Size Matters
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