As the stock market waited anxiously through the Federal Reserve’s Jackson Hole Summit this weekend for clues to future monetary actions, another conference was held just miles away. The American Principles Project, a conservative non-profit, hosted the conference, and participants and speakers did not hide their worry over how the Fed’s unprecedented actions will harm future economic prosperity.
Steve Lonegan, the director of monetary policy for APP, said he was motivated to host the alternative conference because monetary policy has been relegated from its previous status as a political issue. In the 19th and early 20th centuries, entire campaigns were centered on monetary policy. (Remember William Jennings Bryan from your high school U.S. History class?) Now, there is little difference between the positions of Democrats and Republicans on the topic.
One of the reasons for this decline is that politicians from both parties do not want a sound money system where the dollar is backed by more than the full faith and credit of the U.S. government, as this is all that is behind the current fiat regime. Sound money places constraints on increased government spending, which has unfortunately been a bipartisan priority over the past decades. Policymakers would rather cast monetary policy as something that is too difficult for average Americans to comprehend—even as they publicly debate far more complex topics such as nuclear centrifuges and climate change science.
While little consensus was reached over the future of monetary policy—the benefits of everything from a return to the gold standard, to inflation targeting, to crypto currencies such as Bitcoin were all discussed—what was made clear in Jackson Hole is that America needs a rules-based monetary policy that takes away discretion from policymakers. This would set the stage for prolonged, stable economic growth.
The Federal Reserve’s dismal track record extends far beyond the recent recession. The dollar's purchasing power has declined by over 80 percent since the early 1970s. Additionally, Carnegie Mellon University professor Allan Meltzer has shown that over the first 100 years of Federal Reserve history, the United States enjoyed both price stability and the absence of banking crises in only about a quarter of those years.
Even when Fed history since the end of World War II (which excludes the Great Depression) is compared to the pre-Fed era, the earlier system wins in terms of price stability and lower depth of recessions.
At the conference, I participated in a panel discussion on how the Fed’s policies affect millennials. I argued that not only does the Fed pick winners and losers through its policies (and the young are consistently the losers), but also that increased political influence on monetary policymakers threatens future growth.
The Fed believes that if it can keep long-term interest rates low, business investment and consumer spending will increase and the economy will grow. Millennials’ professors have undoubtedly told them that the way the Federal Reserve can make the economy grow is by pumping out dollars and stimulating demand. But these neo-Keynesian theories are too simplistic to accurately describe what is really going on in the economy. The Federal Reserve has been pursuing the same easy-money policies for over six years now, yet the United States has experienced one of the slowest recoveries in history.
The fundamental problem is that with booming entitlement spending, an internationally-uncompetitive corporate tax rate, and annual regulatory costs over $1 trillion, many Americans appeal to the head of the Federal Reserve to help the economy. But Janet Yellen cannot cure all the economic problems that afflict millennials. It is not that members of the Fed are bad people, but, rather, as George Mason University economist Larry White said, “they are simply bad wizards,” who cannot improve the economy by pulling various monetary and fiscal policy levers.
Rather than increasing the Fed’s role in today’s economy, politicians and policymakers need to realize the limits of what a central bank can achieve. As with any other part of government, the Federal Reserve has a tendency to pick winners and losers and to submit to political influence. Both of these realties do not bode well for millennials or future economic growth. Presidential candidates from both sides of the aisle should take note and bring the discussion of money away from academic economists and back to public discourse.