On Friday, Paul Krugman wrote, On Economic Stupidity. It’s nominally about the Federal Reserve’s Open Market Committee (FOMC) and its independence. The Republicans really have shown a desire to destroy it since a Democrat has been in the White House. But while his attack on Republican economic stupidity is to the point, it is perfunctory. Yes, we know the Republicans are really bad. But let’s not forget who the real enemy is: Bernie Sanders. You see, Sanders voted for a bill that would make the Federal Reserve reveal the beneficiaries of its “special lending.” Clinton didn’t do this, which is a Very Good Thing. Krugman really should just put up a Hillary Clinton 2016 sign on his lawn and be done with it.
Dean Baker sees things a bit differently, but then, he has yet to show himself in the can for one candidate or another. He wrote, Paul Krugman, Bernie Sanders, and the Fed. And he made two points. First, he questions Krugman’s assumption (Lots of Krugman unstated assumptions these days!) that what Sanders did was wrong, “To my view, Sanders should be applauded for his actions on this front. It was a bipartisan effort that gave us more information about what went on in the crisis and the extent to which specific banks benefited from access to the Fed’s money.”
The FOMC Is Political
The second point is more interesting. The FOMC is made up of 12 members: 7 appointed by the government and 5 effectively appointed by the big banks. Right now, because of Republican blocking, there are only 5 government appointees, so it is an even split with a 10 member board. So the banks have undue influence, and the Republicans are able to give them even more influence.
Baker suggests we think about putting together a more diverse group on the FOMC, which includes labor unions, community groups, nonprofits. This might make the Fed more focused on full employment rather than its laser focus on low inflation. True, that would make the Fed a more political institution, but anyone who claims that the Fed is not a political institution is either naive or ignorant.
But Krugman is falling into a trap that he has spotted many times in others over the years. He has written a great deal about how the great “centrist” pundits claim that they have no ideology, when in fact they very much do. I want to be clear: everyone has an ideology. All Krugman is saying here is that he agrees with leaving the system the way it is. And indeed, it has worked well for him. People in the upper parts of the economy have done very well by the Fed because it really has done a great job of keeping the economy stable.
But if you are in the lower part of the economy, you have seen the down side of that stability: difficulty finding work, and low and stagnant wages when you do. But even Krugman admits that the bankers have too much clout at the FOMC. In a blog post following up on his column, he makes the case that the real problem is that people who hang out together tend to think alike, and that the problem isn’t “crude corruption.” I agree. But somehow, Krugman seems to think this works in Clinton’s favor too.
I’ll admit, Sanders has done a bad job of explaining this. I certainly don’t think that Clinton was “bought” by Goldman Sachs. Rather, she is of a type. Would she be in favor of changing the makeup of the FOMC? I don’t think so. Does that matter? Well, Paul Krugman certainly doesn’t think so. But that may just be because he is so laser focused on the true enemy in 2016: Bernie Sanders.