When does the Fed compromise its own independence?
It happens, but rarely, and almost never through its research function. Kevin Hassett's recent apology does not go far enough to respect the social benefits of Fed (research) independence.
Hassett has a nice smile and a nice tie and a not very nice understanding of why the independence of Fed research is such a social good.
Welcome back to PCB Central, a blog by Wharton professor, Fed historian, and amateur powerlifter/triathlete Peter Conti-Brown. Normally today’s post would have gone out on Wednesday, but a 24-hour bug (the details of which I will omit even from confessional essays) knocked me out. I’m back, though, feeling strong. This newsletter is reader supported, so subscribe below and send to friends. Today’s post is paid, which also gets you access to the recorded conversation, access to the catalogue of hundreds of essays on a variety of topics, and my deep personal gratitude. But join for free too for access to the free articles, which come each week. Subscribe below!
Kevin Hassett retracted his recent, embarrassing call for Fed researchers to face discipline because he didn’t like the results of their blog post (that built on the model of a previous paper they had published in the peer-reviewed Journal of Economic Perspectives). The post called into question one of the central promises of the Trump Administration’s increasingly failed tariff policy: that these were not taxes on the American people, but fees levied on foreigners. The paper concluded “that the bulk of the tariff incidence”—that is, who pays for the tariff—“continues to fall on U.S. firms and consumers.”
If the authors are right about this, then the Administration’s promise to stick these tariffs on foreigners turned out to be as strong as its argument that the Supreme Court would uphold the tariffs in the first place.
It also raised another question. Hassett, in his apology, said in his defense that he “was upset at what [he] felt and feel was the Fed’s dissemination of politically sensitive research on an issue that goes beyond its primary focus.”
What should we make of this claim that the Fed (through its researchers) is engaged in politically sensitive research? Should these Fed researchers, who largely (but not exclusively) determine their own research agendas, trim their sails to accommodate Kevin Hassett’s particular partisan political winds?
No, is my answer. In today’s post—drawn on my forthcoming book, The Federal Reserve: An American History—I describe a low-water mark in the Fed’s history when the Fed Chair did indeed cross a line between appropriate policy and inappropriate political activity.
Research, however, is on the opposite end of that spectrum. All of us—left, right, center—should want the Fed to be at the cutting edge of relevant research. The word “relevant” is doing a lot of work here, but it should be read very broadly. Tariff research is so far away from the hypothetical line that Hassett’s half-apology is still an embarrassment to the Administration and to his own reputation.
When central bankers get political
The Fed’s history is filled with instances of Fed principals involving themselves in the political process. This is an irreducible part of the tasks that Congress has placed at the Fed’s feet. These decisions involve important political decisions and important political tradeoffs. The best Fed officials have recognized this and managed it well, to the benefit of the country.
At times, though, they have veered off path. Today I’ll tell the story of one: former Fed Chair Alan Greenspan’s active participation in Bush 43 Administration’s (failed) efforts to privatize Social Security. It reflected a partisan error of judgment that did damage to the Fed. If Kevin Hassett were serving as NEC Director at the time and lambasted Greenspan for mixing it up with partisan politics, I would agree with him.
Greenspan’s Social Security Advocacy
Social Security is arguably the most enduring accomplishment of Franklin Roosevelt’s New Deal, even as it has changed substantially since its inception. (Originally, and
