Before going to the White House, Donald Trump demanded that the Fed raise interest rates despite high unemployment and low inflation. Now he’s demanding rate cuts, even though the unemployment rate is much lower and inflation at least a bit higher. To be fair, there is a real economic argument for rate cuts as insurance against a possible slowdown. But it’s clear that Trump’s motives are and always have been purely political: he wanted the Fed to hurt President Obama, and now he wants it to boost his own reelection chances.
It’s not surprising, then, that Trump is also trying to stuff the Federal Reserve Board with political allies. What may seem surprising is that many of his would-be appointees, like Stephen Moore and now Judy Shelton, have long records of supporting the gold standard or something like it. This should put them at odds with his efforts to politicize the Fed. After all, one of the supposed points of a gold standard is to remove any hint of politics from monetary policy. And with gold prices rising lately, gold standard advocates should be calling for the Fed to raise rates, not lower them.
But of course both Moore and Shelton have endorsed Trump’s demand for rate cuts. This creates a dual puzzle: Why does Trump want these people, and why are they so willing to cater to his wishes?
Well, I think there’s a simple answer to both sides of the puzzle, which involves the reason some economic commentators (not sure if they deserve to be called “economists”) become goldbugs in the first place. What I’d suggest is that it usually has less to do with conviction than with cynical careerism. And this in turn means that goldbugs are, in general, the kind of people who can be counted on to do Trump’s bidding, never mind what they may have said in the past.
Let me start with what might seem like a trivial question, but which is, I believe, crucial: What does it take to build a successful career as a mainstream economist?
The truth is that it’s not at all easy. Parroting orthodox views definitely won’t do it; you have to be technically proficient, and to have a really good career you must be seen as making important new contributions — innovative ways to think about economic issues and/or innovative ways to bring data to bear on those issues. And the truth is that not many people can pull this off: it requires a combination of deep knowledge of previous research and the ability to think differently. You have to both understand the box and be able to think outside it.
I don’t want to romanticize the mainstream economics profession, which suffers from multiple sins. Male economists like me are only beginning to comprehend the depths of the profession’s sexism. There’s far too much dominance by an old-boy network of economists with PhDs from a handful of elite institutions. (And yes, I’ve been a beneficiary of these sins.) Many good ideas have been effectively blocked by ideology — even now, for example, it’s hard to publish anything with a Keynesian flavor in top journals. And there’s still an overvaluation of mathematical razzle-dazzle relative to real insight.
But even for people who can check off all the right identity boxes, climbing the ladder of success in mainstream economics is tough. And here’s the thing: for those who can’t or won’t make that climb, there are other ladders. Heterodoxy can itself be a careerist move, as long as it’s an approved, orthodox sort of heterodoxy.
Everyone loves the idea of brave, independent thinkers whose brilliant insights are rejected by a hidebound establishment, only to be vindicated in the end. And such people do exist, in economics as in other fields. Someone like Hyman Minsky, with his theory of financial instability, was, in fact, ignored by almost everyone in the mainstream until the 2008 crisis sent everyone scurrying off to read his work.
But the sad truth is that the great majority of people who reject mainstream economics do so because they don’t understand it; and a fair number of these people don’t understand it because their salary depends on their not understanding it.
Which brings me to the gold standard.
There is overwhelming consensus among professional economists that a return to the gold standard would be a bad idea. That’s not supposition: Chicago’s Booth School, which surveys a broad bipartisan group of economists on various topics, found literally zero support for the gold standard.
The events of the past dozen years have only reinforced that consensus. After all, the price of gold soared from 2007 to 2011; if gold-standard ideology had any truth to it, that would have been a harbinger of runaway inflation, and the Fed should have been raising interest rates to keep the dollar’s gold value constant. In fact, inflation never materialized, and an interest rate hike in the face of surging unemployment would have been a disaster.
Thank God we weren’t on the gold standardCreditFederal Reserve of St. Louis
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Thank God we weren’t on the gold standardCreditFederal Reserve of St. Louis
So why did gold soar? The main answer seems to be plunging returns on other assets, especially bonds, which were the product of a depressed world economy. What this means is that in practice pegging the dollar to gold would mean systematically raising interest rates when the economy slumps. Not exactly a recipe for stability.
Why, then, does goldbuggery persist? Well, some billionaires — such as Robert Mercer, also a big Trump supporter — have a thing about gold. I’m not entirely sure why, although I suspect that it’s just a plutocratic version of the Fox News syndrome — the angry old white guy ranting about big-government types inflating away his hard-earned wealth to give it away to Those People. And these billionaires give a lot of money to libertarianish think tanks that peddle gold standard derp.
Now imagine yourself as a conservative who writes about economics, but who doesn’t have the technical proficiency and originality needed to get a good job in academia, an economic policy institution like the Fed, or a serious think tank. Well, becoming a vocal gold-standard advocate opens a whole different set of doors. You’ll have a much fancier and more lucrative career, get invited to a lot more stuff, than you would if you stayed with the professional consensus.
What I’m suggesting, in other words, is that gold-standard advocacy is a lot like climate change denial: There are big personal and financial rewards for an “expert” willing to say what a few billionaires want to hear, precisely because no serious expert agrees. In the climate arena, we know that essentially all climate deniers are on the fossil-fuel take. There may be some true believers in the monetary magic of gold, but it’s hard to tell; what we do know is that prominent goldbugs do very well relative to where their careers would be if they didn’t buy into this particular area of derp.
And that, in turn, brings us back to Trump.
Why would Trump expect goldbugs to abandon their principles and back his demands to fire up the printing presses? Why is he, in fact, apparently finding it easy to get goldbugs willing to turn their backs on everything they claimed to believe?
The answer, I’d submit, is that it was never about principles in the first place. Many, perhaps most prominent goldbugs advocate a gold standard not out of conviction but out of ambition; they sold their principles a long time ago. So selling those pretend principles yet again in order to get a nice Trump-sponsored job is no big deal.
How the Federal Reserve could become a partisan weapon
For more than a generation, the Federal Reserve has floated above politics, even as partisan conflict has consumed other public institutions. Republican chairmen, including incumbent Jerome Powell, have run the Fed for 28 of the last 32 years, yet you’d struggle to find a trace of monetary favoritism when Republicans occupied the White House.
That political appointees have behaved so apolitically is not a law but a norm taken for granted by both parties—until now. At first, President Trump observed that norm: His Fed appointments were praised as qualified, competent and apolitical, including Mr. Powell, at the time a sitting governor. But he is now breaking from that norm. He has publicly attacked Mr. Powell for raising interest rates and has proposed naming to the Fed two loyalists who share his views.
It takes more than just a president to politicize the Fed: Its chairman and Congress must also acquiesce. For now, Mr. Powell and his current colleagues seem unlikely to be swayed. The real test is whether Congress is prepared to let Fed appointments become, as they are with the Supreme Court, a tool of partisan advantage.
.. Mr. Trump’s two proposed nominees have drawn criticism over their qualifications. Stephen Moore has a degree in economics, and Herman Cain was a successful businessman, but neither has worked in finance, or has a deep grasp of monetary policy. (While Mr. Cain chaired the board of one of the Fed’s 12 reserve banks, that position carries no monetary responsibility.) Their main qualification is that they are vocal advocates for Mr. Trump. Mr. Moore this week said the Fed may be endangering Mr. Trump’s re-election prospects with tight monetary policy.
.. If they don’t agree, they’ll be just two votes on the seven-member board of governors that, along with five of the 12 reserve bank presidents, decides monetary policy, usually by consensus. Two dissidents can make life hard for the chairman, with critical speeches and media appearances. But if their arguments aren’t credible, they won’t sway any other members. Indeed, other officials may draw closer to Mr. Powell out of solidarity… Historically, only the Fed chairman can bend policy to a president’s wishes. Arthur Burns did so for Richard Nixon in the early 1970s because he saw himself as part of Mr. Nixon’s team. Ronald Reagan appointed four governors who in 1986 briefly approved a rate cut over the opposition of then-chairman Paul Volcker. When Mr. Volcker stepped down the next year, Mr. Reagan named Alan Greenspan, a longtime Republican insider, to succeed him. But Mr. Greenspan proved as independent as Mr. Volcker, repeatedly defying White House pressure to keep rates down. From 1993 until last year, presidents stopped trying.
.. Mr. Powell has said he would not resign or change course just to please Mr. Trump. Yet that alone may not be enough to insulate the Fed. Governors frequently resign before the end of their terms. If just two do, Mr. Trump can name enough loyalists to outvote Mr. Powell on the board, significantly undercutting his authority. And in 2022, Mr. Powell’s term as chairman is up. If Mr. Trump is re-elected, his recent behavior suggests he will look for a chairman who puts the White House’s agenda first. If a Democrat is president, he or she may do the same. If Mr. Trump tries to force Mr. Powell out before his term ends (legally, he can only be fired for cause), the Senate would have to confirm his replacement, perhaps with Mr. Trump’s re-election at stake.
For this to happen, senators would have to knowingly confirm nominees picked for their loyalty rather than their qualifications. It isn’t far-fetched. Senators once confirmed judges based on their qualifications, but today ideology is as important, and often more so.
In the wake of the last recession, Republicans regularly attacked the Fed’s efforts to stimulate the economy for supposedly fueling inflation and enabling Barack Obama’s deficit spending (there was no evidence for either). Mr. Moore and Mr. Cain piled on. Some pushed legislation to curb its independence. In 2011 Richard Shelby, a top Republican on the Senate Banking Committee, blocked Mr. Obama’s appointment of Peter Diamond, a Nobel Prize-winning Ph.D. economist, to the Fed because he lacked “the appropriate background, experience or policy preferences.”
In contrast, Mr. Moore, despite a lack of formal qualifications, is widely liked by Senate Republicans for his decades of tireless campaigning for lower taxes. Mr. Shelby recently said: “He will be a new voice on the Fed; I believe the Fed could use a voice like that.”
As far as I know, the Federal Reserve — the world’s most important economic policy institution — doesn’t have an anthem. But if it were to adopt one now, the choice would be obvious: “Send In the Clowns.”
You see, the Fed’s governing board currently has two vacancies, and Donald Trump has proposed filling those vacancies with ludicrous hacks. If he succeeds, one of our few remaining havens of serious, nonpartisan policymaking will be on its way toward becoming as corrupt and dysfunctional as the rest of the Trump administration.
Stephen Moore and Herman Cain are, of course, completely unqualified — I say “of course” because their lack of qualifications is, paradoxically, a key qualification not just for Trump but for the G.O.P. in general.
There are plenty of genuine monetary experts with conservative political leanings, some of them quite partisan. But modern Republicans have shown consistent disdain for such experts, perhaps because of a sense that anyone with real expertise or an independent reputation might occasionally be tempted to take a stand on principle.
There’s no risk that either Moore or Cain will ever take such a stand. In fact, what seems to have recommended both men to Trump was their evident willingness to completely reverse their policy views when politically expedient.
Both were hard-money men during the Obama years, demanding higher interest rates despite very high unemployment. Both have now taken to berating the Fed for failing to print more money in the face of low unemployment — because that’s what Trump wants.
That said, there’s a difference between the two men.
I wrote about Moore a couple of weeks ago, noting that he has long been a prominent fixture in the conservative movement; he is, basically, a classic right-wing hack who tries (incompetently) to impersonate an economic expert. Cain, on the other hand, is a spam king whose business model involves making his email list available to direct marketers.
Put it this way: In recent years Moore has been out there predicting magical results from tax cuts, putting out fake economic numbers, and giving speeches to FreedomFest. At the same time, Cain has been offering a platform for peddlers of get-rich schemes and cures for erectile dysfunction. So it says something about what Trump wants that he apparently sees the two men as equally valuable allies.
What does Trump want? His attempted beclowning of the Fed follows, I’d argue, from the fact that his one major legislative success, the 2017 tax cut — which he predicted would be “rocket fuel” for the economy — has turned out to be a big fizzle, economically and, especially, politically. .
It’s true that U.S. economic growth got a bump for two quarters last year, and Trumpists are still pretending to believe that we’ll have great growth for a decade. But at this point last year’s growth is looking like a brief and rapidly fading sugar high.
Meanwhile, the tax cut remains unpopular, partly because few people perceived personal benefits, partly because voters appear to be less concerned about paying too much than with the sense that the rich — the prime beneficiaries of the Trump cut — are paying too little.
Some leaders might see such disappointments as reasons to make a course correction. But this is Trump: When the going gets tough, he blames someone else. Everything would have been great, he insists, if the Fed hadn’t thwarted his plans.
There’s a good argument to be made that the Fed misjudged the economy’s strength, that it raised interest rates too fast and that the economy would be doing somewhat better if it hadn’t. In fact, it’s an argument I agree with.
But that’s not what Trump is saying. He wants the Fed to act as if we were still in a deep depression; he wants it both to cut rates and to resume the emergency policies it pursued — and he denounced — when we had more than twice as much unemployment as we do today. This would, he insists, turn the economy into the “rocket ship” he originally promised.
You don’t have to be a gold bug or even an inflation hawk to see these demands as deeply irresponsible. Indeed, they sound a lot like the “macroeconomic populism” that has repeatedly led to economic disaster in Latin America, with Venezuela the latest example.
Running the printing presses to fight a depression, as the Fed did after the financial crisis, is prudent and sensible; running them because you refuse to accept the reality that your policies aren’t delivering an economic miracle is different, and always ends badly.
Now, even putting both Moore and Cain on the Fed board probably wouldn’t be enough to push America over the monetary edge. And so far, markets don’t seem worried about the potential for runaway inflation.
But maybe investors should be worried, at least a bit, by the spectacle of a president who would rather appoint hacks and debase the Fed’s integrity than admit that his policies aren’t working as promised. U.S. policymaking is looking ever more like that of a corrupt third-world regime. And that is bound, sooner or later, to have consequences.
President Trump is considering nominating Herman Cain, who abandoned his 2012 presidential bid in the face of escalating accusations of sexual misconduct, for a seat on the Federal Reserve Board, according to two people familiar with the matter.
Mr. Trump has been considering tapping Mr. Cain, the former chief executive of Godfather’s Pizza, for several weeks but is waiting for a federal background check before officially nominating him to the Fed, one of these people said.
The decision to consider Mr. Cain signals the second time in weeks that Mr. Trump has floated candidates with deeply-held political views to fill a seat on the Fed, which is a traditionally independent body. Mr. Trump also plans to nominate Stephen Moore, a conservative economist and longtime economic adviser, as a Fed governor.
Mr. Moore’s potential nomination has been clouded by revelations of ethical and financial issues that surfaced in recent weeks, including a 2013 contempt of court charge stemming from failure to pay child support to his former wife. The White House has said it remains committed to nominating Mr. Moore, who is currently undergoing a background check.
Mr. Cain’s nomination is being supported by Larry Kudlow, who heads the National Economic Council and also recommended Mr. Moore for a Fed seat, according to a person familiar with the discussions.
It is unclear whether Mr. Cain will clear the background check. His presidential campaign came to a screeching halt after several women came forward with accusations of sexual harassment.
