Fed's Leadership Is Best Left to the Economists
The case is being made these days, especially in light of President Donald Trump’s selection of many business leaders to head various government departments, that more executives should be appointed as Federal Reserve Board governors. The underlying idea is that business people have dealt with tough real-world decisions, in contrast to formally trained academic economists, who are commonly selected from universities and lack such experience. There’s no doubt that good business people could manage well, but good economists should have a somewhat easier time.
Choosing business people or academic economists need not be mutually exclusive. In fact, Bloomberg News reported June 2 that Trump is considering nominating Marvin Goodfriend, a widely respected monetary economist, as a finalist for a seat on the Fed's Board of Governors. Randal Quarles, a former Treasury official under President George W. Bush, is also said to be a candidate.
Both strong management skills and technical expertise would be useful. However, the core of the policy management issue is an understanding of the underlying economics and being able to take into account the risks of moving interest rates up or down in pursuit of the dual policy mandate. A really good manager leans on technical expertise when it is needed. So the head of the Fed could, at least in principle, be a business leader. However, if a Fed chief doesn’t appreciate the nuances inherent in each environment or the underlying principles driving the economy, he or she would be more likely to fail. And failure means make bad policy decisions, which can occur quite easily if a central bank chair thinks they can override the technical advice provided by well-trained economists.
This isn’t a hypothetical or theoretical possibility. G. William Miller, who served under the Jimmy Carter administration, earned a bachelor’s degree in marine engineering, before earning a law degree, and he worked for one of the top law firms. He then joined Textron, became its president, and was highly regarded for his business accomplishments. No doubt, Miller was a bright guy, but he wasn’t an economist. Most critically, he didn’t rely on the Fed’s outstanding staff of trained economists. When appointed Fed chairman, he thought inflation was caused by forces outside the central bank's control, so he focused on pro-growth expansionary policies, which allowed inflation to increase sharply. This approach quickly self-destructed and he made a bad inflation problem even worse during his short tenure. Within 18 months, Miller was moved out of the Fed and appointed secretary of the Treasury, a post often held by business people. Paul Volcker, Miller's successor, was forced to push interest rates to extraordinary heights to create a recession that slowly brought inflation down at the cost of a large rise in unemployment. No non-economist has held the Fed chair since then.
If the Fed chair is also a well-trained economist, as has been the case for several decades now, they can more easily grasp the arguments and press the staff to investigate key issues. Without that direction, the staff will tend to pursue the issues that interest them. Moreover, managing an economy isn’t easy for a trained economist, as so many of today’s circumstances are without precedent. In truth, unprecedented problems are the norm, not the exception. Without formal training in economic theory, it will surely be even harder for a business person to appreciate the consequences of any policy decisions taken to address new issues. Such a leader would have no guideposts in trying to formulate policy. While economists might make policy mistakes, the risk of errors is much greater with business leaders at the helm.
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