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Carola Binder and Christina Parajon Skinner on Populism and Legitimacy at the Federal Reserve
The Fed’s attempt to balance appeals to both technocracy and populism brings with it significant risks to its institutional legitimacy.
Carola Binder is an Associate Professor of Economics at Haverford College, and Christina Parajon Skinner is an assistant professor at the Wharton School at the University of Pennsylvania. Both are returning guests to Macro Musings and they rejoin the podcast to talk about populism at the Fed and its implications for policy. Specifically, they discuss rising technopopulism at the Fed, the effect of populist pressures on its legitimacy, the importance of balancing experimentation and intellectual freedom with managing risks of politicization at the Fed, as well as their thoughts on the recent bouts of inflation.
Read the full episode transcript:
Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].
David Beckworth: So Carola and Christina, welcome back to the show.
Carola Binder: Thank you. It's great to be back.
Christina Parajon Skinner: Great to be back. As I joked to you, I'm ‘cheersing’ my mugs together, David.
Beckworth: Yes, that's right. You both have your nominal GDP targeting mugs, is that right?
Skinner: Yes, we do.
Beckworth: Okay. Well, now we are recording this on November 22nd and we just learned that J Powell has been renominated and it's been my goal, unsuccessful so far, to get him a nominal GDP targeting mug. So I'm hoping at some point, in fact, if you're listening, J Powell just reach out to Mercatus and we'll send you one at your convenience. But we're here today to talk about populism at the Fed. In fact, we just had an amazing conference last week, we were all a part of it. But you two ladies were on the panel on populism and the Fed, very provocative, very interesting. And we'll provide a link to that as well. And I enjoyed watching your presentation there.
David Beckworth: But today we're going to talk about this and it's very timely, I mean, I just mentioned Jay Powell is now renominated. But that whole process was so politically charged. Certain progresses were really, really pushing back against him. And from where I stand, it looks like it's really politicized and making the political process tougher for the Fed to navigate through. And as you're going to mention as we go forward in a conversation, there's been a lot of push for the Fed to go into areas that normally it doesn't go. And so I think this is all very important and timely because it looks like next year the Republicans could win back the House. And what are the Republicans going to do if they see a very politicized Federal Reserve? That gives us concerns about independence, the ability of the Fed to do its dual mandate.
David Beckworth: So I'm delighted to have you two experts on to talk about this. And you both presented at the Cato Conference, as I mentioned, and you both had papers. So we'll walk through those papers and you also have some joint work, that's really fascinating. And I can't to talk about your joint work, because you found some interesting trends in the research. So folks stick around to the end of the show to hear what these amazing trends in the research output from the Federal Reserve is becoming all right. So Carola, let me start with you. You had a paper on technopopulism. And when I first saw that I thought of some kind of dance club or something, but it's really technopopulism and the Fed. So walk us through the idea of your paper.
Rising Technopopulism at the Fed
Binder: Sure. Well, the phrase technopopulism, it comes from political science and I heard of it through the work of two political scientists named Bickerton and Accetti, who wrote a book about it. And their book was about technopopulism as this new type of political organization that was arising mostly in Western Europe that really combined an emphasis on the technocratic appeal, like the appeal to expertise with the populist appeal. The appeal to representing the people as a whole. And it's interesting because we usually think about technocrats and populists as being antagonistic. So these two extremes you have the technocrats and then the populists would hate the technocrats. And when we talk about central bank independence and the threat from populism, that's usually how it's framed. Like there's this populist threat to central bank independence because central bankers are technocrats who populists kind of love to hate.
Binder: But the idea of technopopulism is that these two types of appeals, the technocratic appeal and the populist appeal, are not actually antagonistic. And in fact, they're often combined in a variety of ways. And the reason that they fit together so well is that both sort of reject the premise of this representative democracy of having mediating institutions, having your interest be represented in a democratic system. So when I was reading this, I thought, "Wow, this really seems to help me understand what's going on with central banks, especially in just the last couple of years." And so my paper is an attempt to explain to more people what technopopulism is and then how it applies to central banks. Both to the kinds of pressures that they're under and then to how they are responding to them. And since I do a lot of work on central bank communication, I really focused on how you can see the influence of technopopulism in the way that central banks communicate and in the way that other people communicate about central banks.
The idea of technopopulism is that these two types of appeals, the technocratic appeal and the populist appeal, are not actually antagonistic. And in fact, they're often combined in a variety of ways. And the reason that they fit together so well is that both sort of reject the premise of this representative democracy of having mediating institutions, having your interest be represented in a democratic system.
Beckworth: Okay. So just to flesh this out, technopopulism, you said basically it's the technocrats at the top directly reaching out and connecting to the people at the bottom, so the populist. And you said they bypass the mediating institutions. So what would be an example of a mediating institution that central banks traditionally work through?
Binder: Well, so traditionally central banks have, or the Fed is independent, meaning it's independent from the political process, but accountable to Congress. So we elect members of Congress as our representatives, and then they hold the central bank accountable. And so when this push for central bank transparency started, it was for central banks to be more transparent to those elected officials. So for the Fed to be more transparent to Congress, presumably so that Congress could hold them accountable for the mandate, which Congress gave to them. But now what you see more of is that the central bank's trying to communicate directly with the public and explicitly saying that that's their goal. They want to communicate to the public.
Binder: And I think at first this was just because there's some benefits of being transparent and of having people understanding what they're doing. And that is still part of why they're trying to communicate with the public. But I think the way that they're doing it now has gotten sort of more politically charged and more like the way populist would communicate, which is about getting people to trust that you're the personality that's going to represent them, that you're the personality that has their interests at heart. And bypassing the sense of it's Congress to whom we're accountable. Partly that's because people are dissatisfied with Congress itself or at least some people are and the Fed thinks it can preserve its legitimacy better, by communicating and appealing directly to the people and bypassing Congress.
Beckworth: So how do we see that direct communication to the population from people at the Fed is that through Twitter, through speeches and what's the evidence?
Now what you see more of is that the central bank's trying to communicate directly with the public and explicitly saying that that's their goal...And I think at first this was just because there's some benefits of being transparent and of having people understanding what they're doing. And that is still part of why they're trying to communicate with the public. But I think the way that they're doing it now has gotten sort of more politically charged and more like the way populist would communicate.
Binder: It is in part through Twitter, of course not the whole public is on Twitter, but the central banks now are on Twitter, central bankers are on Twitter. It's also through their speeches, even through, like Christina and I will talk about related to our research, even through the central banks, the reserve banks research that they do. They're writing the pieces that are more on topics that appeal to the public. Their websites in some of my slides at the Cato panel, I was showing you what, like say the ECBs website homepage looks like now compared to how it looked just five or six years ago, or it used to look very technocratic, it had just a bunch of charts and numbers on it.
Binder: And now it has this huge picture of president Lagarde, of Christine Lagarde and so it's basically removed a lot of the numbers and the texts, and it's a big focus on the personality and it's just about, trust the person. And it's interesting to think about this today, because like you mentioned, this is the day that Powell was, that it was kind of announced that he would be reappointed. And you can see how much, like people were wondering about this and how big of a deal it is, in part that's because there is such an emphasis on the leader’s personality.
Binder: And if it were really a technocratic central bank, that was more or less just following some rules that it had a set mandate that everyone understood and everyone understood what exactly the mandate meant. And it wouldn't be as big of a deal who the leader was, right? But the markets were responding and everyone was trying to predict who was going to be appointed because there is so much emphasis on the person in charge, and if it had not been Powell, there would've also been a huge market response because there's so much emphasis on who that person is and who it is actually has a big effect on what people think that the Fed's going to do.
Beckworth: Yeah. It was interesting to see the market response this morning after the nomination. It seemed to be very happy market, but we also saw treasury yields go up, the dollar go up, which maybe is a signal that they viewed Brainard's more dovish than Powell. So personalities matter. One other example that comes to my mind. I think you mentioned this in your paper is like the listening tours, right? The listening tour, you're listening directly to the public, you're bypassing Congress going straight to the folks at the bottom. Is that a good example?
Binder: Yeah, that is. The listening tours, it's interesting because in the Bickerton and Accetti book on technopopulism, they talked about some of the techno populist parties in Western Europe doing this exact sort of thing. This listening tour, where they would kind of walk around the country and solicit people's opinions about what they ought to do. And so it seemed like a great parallel to that where now the Fed is going around the country and listening to different groups of people. And yeah, it's interesting to wonder just how much are they actually responding to what the public tells them? And they certainly cite these listening tours pretty frequently when they're explaining why they've adopted different policies, like the average inflation targeting. Powell explicitly talked about the Fed listening events as influencing that decision. But I wonder to what to degree the decisions are already made, and then they go do the listening tour and use that to justify the decision versus the decision wasn't already made and the listening tour influenced it. And I'm not sure that we can really know which of those it was.
Beckworth: Yeah. So to be charitable of the Fed, you're saying some of this just might be political theater or that they're saying the right things, making the right appearances, but they already made their mind based on technocratic choices. So along these lines, I was thinking of the letter that Senator Toomey sent to the Fed, where he was upset about, the research seems to be very woke or very progressive, and he was complaining about it. I wonder if we can see that letter and that exchange between him and the Fed as a mediating institution beginning to feel like they're left out and they want to get back into the mix, right? They want to part of the conversation. Is that one way to look at that experience?
Binder: I think so, yeah. I think part of what was mentioned in that letter was that we do have other departments and offices in the government that maybe have more explicitly, some of these areas as their domain. So then Senator Toomey was questioning, "Well, why do we have kind of technocrats doing this when we could have other people that were responsible for it?" But yeah, I think it also could be, well, the Fed is accountable to Congress, so we want them to explain themselves directly to Congress rather than going out and using these kinds of listening events as the justification for what they're doing. It's like, if the people want certain policies to happen, they should be going to Congress and telling Congress to do it rather than getting this Fed to do it.
Beckworth: Well, that's very interesting Carola. And this framework of technopopulism is fascinating and we'll provide the link to your paper, so everyone check get out. Let's go to Christina and you had a paper as well, that's related to this on the pressures of populism. And how do you think about, or kind of explain the rise of populism on central banks? What's your approach?
Skinner: Yeah. So Carola and I didn't plan our papers together, but they really did one wind up being complimentary, I think. So like Carola's work on technopopulism, my project for the Cato conference really also tries to understand why we're seeing this version of populist pressure on the Fed that we are today to engage in sort of what I would describe as these various forms of economic and in some cases, social engineering. And I'm also trying to use the Cato project to think about what's new about this. Now, before I get into my legal theory about this, I want to set the stage a little bit and give your listeners a little bit of backstory about how I've been thinking about populism and the Fed. You were talking with Carola about mediating institutions, and I'm also really focused on the role of Congress here.
Skinner: So administrative and constitutional law 101 provides that the Fed is an agent of Congress, it's an agency. If we're using central banks speak, then we would say the Fed does not have goal independence. So as you two were discussing, this means that the Fed needs legislative instructions from Congress to lawfully pursue any new kinds of social or economic justice goals. And of course the main ones now are proactively mitigating climate change or inequality or pursuing financial inclusion. And the fact of the matter is the Fed just doesn't have a mandate to engage in these various projects right now. And so that was very much sort of the subject of my last paper that I discussed with you on the show. But what I noticed is that, there still very much is pressure on the Fed to take up these goals.
Skinner: And I see it as a pressure very specifically to short circuit this democratic process that is in fact, a constitutionally required one. And I also see it as a new form of an intellectual elite populism. And it was sort of captured or encapsulated in an argument that I would frequently encounter when I was talking about central bank activism, which goes something like this, "I appreciate your rule of law points here about the need to work through Congress, but that's a fantasy. There's no time for that. Congress is gridlocked and we believe these are important issues. And so if the Fed has the power to do something to advance these goals, well, the Fed should just do it. Flex the mandate, stretch them, after all it is broadly worded enough." So the argument goes.
Skinner: Now, I think you can call it elite expediency if you will. But I would also say it's this new form of Fed related populism. So as I said in the Cato conference, I wrote this paper called “Capture the Fed,” right? We're in this game of capture the Fed between those that believe the democratically response of institution of Congress must lead the way and those that would sort of give up on the legislature and say, well, the ends will justify the means. And so I wanted to explore this divide more after that initial paper on the activism. Why are we seeing this kind of pressure mounted on the Fed to do more and more? Why does it even seem like this in run around Congress is on the table? And so I was trying to understand in the paper, what about the law governing? The Fed seems to be enticing these attempts to capture the Fed, so to speak.
We're in this game of capture the Fed between those that believe the democratically response of institution of Congress must lead the way and those that would sort of give up on the legislature and say, well, the ends will justify the means. And so I wanted to explore this divide more after that initial paper on the activism. Why are we seeing this kind of pressure mounted on the Fed to do more and more?
Beckworth: Well, before we get to the law explanation, I just want to throw out a few examples that strike me as part of the motivation for attempting this in run. And that is the two things. One, the emergency facilities that were done in 2008, 2020, the Fed was just able to magically step in and calm markets and exercise some authority that's you could legally question, but it demonstrated the Fed had all this ability, all this power to radically keep markets calm. The other thing it strikes me, is this the size of the Fed's balance sheet. The Fed's been able to intervene QE1, QE2, QE3, without any apparent cost. And I'm wondering people are kind of sitting back and observing the Fed has this emergency authority, it has a balance sheet that doesn't seem to cause inflation. So why not do fiscal QE as George Selgin would call it? It's like a free lunch. I wonder if that at all plays into any of this.
Skinner: Yeah. So that's a great question. I mean, when I explored the issue of activism before, I looked at the increasing size of the Fed's role in times of financial crisis, and then I also looked at these other issues that you might put more so on the ledger of social and economic justice issues, if you will. And I think the emergency sorts of measures do pose concerns about activism but they pose, I think more difficult ones. They didn't take up in the Cato paper, because at the end of the day, when we sort of evaluate activism, it's a balance between not tying the hands of the Fed in crises, and thinking about the Fed's proper role in crisis and how do you constrain it? So, I mean, we get into this a little bit when we talk about legitimacy and I'm fast forwarding a bit.
Skinner: But we try and wrestle with that need for balance between what we might perceive to be as activism and what one might perceive to be as sort of agility in crisis then we say, perhaps one important criteria of legitimacy has to be the Fed's own exercise of self-restraint in terms of leveling up in crisis, but then leveling back down in peace time. And that was something I talked a lot about when I was talking about QE and I gave testimony to the House of Lords on this very subject. And having that clear distinction, that clear and crystal distinction between QE or liquidity facilities, 13(3) facilities and crisis war time. And then what is the trigger to say, "Okay, now we are in economic recovery mode." "Now we are in peace time, so to speak. The Fed has to be trusted to level back down its powers." And that's got to be a key criteria of the legitimacy of expanding power in crisis. But again, I try and have a cohesive theory that separates the Fed crisis related activism, if you will, and these other projects.
Beckworth: I guess I'm wondering, even though I agree, and I supported the Fed jumping in. There is something that had to be done in the midst of the panic, but I'm just wondering if it sends a signal that people look at it and like, "Oh, there is this free lunch." So whether emergency facility use is legal or not, the merits set that to a side, just, it sends a signal, the Fed can do so much. Why not do inequality, why not do climate change? It's the siren call of this all powerful institution.
Skinner: Well, that's exactly right. I mean, I think that's sort of the first order question, which is to say the Fed has tremendous power, and that power, as you say, David has been on full display. So setting the law to the side, I think that was the first incentive that is put on the table, which is here is this institution that is tremendously effective, has a lot of power. So then you sort of get into this sort of slippery slope thing. Well, why not tackle this other sort of social or economic crisis? Where do you draw the line, right? I mean, we know that there are a number of really important economic and social issues that aren't all jobs for the Fed, but once you start sort of expanding the role of the Fed, then perhaps those lines become blurrier.
Skinner: And that's why Carola and I are talking so much about the need for Congress to be clear about what's in bounds, what's out of bounds, right. It can't be up to the people directly, and it certainly can't be up to this cadre of intellectual elites, so to speak. And so that's why the Cato paper sort of, I get into these, "Okay, well, here's where we might see some structural vulnerabilities to populism in the dual mandate and in financial stability," et cetera.
Beckworth: Yeah. Very fascinating. And what we're talking about here is basically the US government doing off balance sheet activities. I mean, again, you don't see the Feds balance sheet causing any kind of inflation or excesses at least for now. And I brought this up, I think back in 2020 on Twitter and someone goes, "But David, the US has a rich history of off balance sheet activity, GSCs, all these home loan banks and stuff." So in some sense, the Fed has fallen in this tradition. But let me go back to a point you made earlier about legitimacy. Why don't you speak to that? How is populism harming the Fed's legitimacy?
The Effect of the Fed’s Populism on its Legitimacy
Skinner: Yeah. So I think, I guess going back to the Cato conference, we're trying to understand or explain the phenomenon of populism. Before that, this summer Carola and I were talking about this question of, "Well, how do we evaluate it?" So I think in bits and pieces of both of our work, we've sort of said, it's not legitimate for the Fed to expand into these other areas without Congress saying so, or what have you, but there's a lot of space we thought to examine further. What exactly does that mean, right? Legitimacy is used in lots of different literatures, and lot of different ways in the central banking context. Paul Tucker has this excellent foundational book.
Skinner: But we wanted to examine this question Fed specific and specific to the current bout of populism that we're seeing, and also to sort of respond to those that would say again, legitimacy is in the eye of the beholder, legitimacy is an empirical question, right? So beyond just saying, "It isn't legitimate for the Fed to do X or Y thing without Congress saying." So we wanted to make it concrete. And we sort of thought of it as part a legal question. So what are criteria of legitimacy, because it's part a question of legal authority, but it's also part an empirical question. So that's why we thought it would be really interesting to combine this question of what does it mean to have legal authority yes or no. And what does it also mean to have this sort of general sense of acceptance that this is what the Fed should be doing?
Binder: Right. And David, you actually introduced Christina and I by email, I guess last year and that prompted this collaboration between us, for our paper about Federal Reserve legitimacy, which I mean, I really want to thank you for doing that because it has worked out really well and it's especially good, I think for me as an economist to get to talk with someone who studies law about what legitimacy means. Because I think we just say the word legitimacy when we're talking about the Fed, but don't necessarily think that hard about what it means. And it's I used to have the idea that legitimate, if it's legal and people kind of like it, but working with Christina, I got to learn that there's a lot more to it than that.
Binder: But like she said, we sort of framed the legitimacy question as two parts, there's a legal legitimacy of the Fed and then what we were calling the democratic legitimacy. And the latter part is more of an empirical question, right? What do people think is acceptable for the Fed to do, what has a wide sense of acceptance versus a lot of differences of opinions? I think when there's topics where there's a lot of differences of opinions, that's where you really want the political process in there, right and not to leave something to a technocrat. So to get at that empirical part, we actually ran an online survey where we surveyed people about both their knowledge of the Fed and also their opinions about the Fed and who should be doing what sorts of policies.
We sort of framed the legitimacy question as two parts, there's a legal legitimacy of the Fed and then what we were calling the democratic legitimacy. And the latter part is more of an empirical question, right? What do people think is acceptable for the Fed to do, what has a wide sense of acceptance versus a lot of differences of opinions? So to get at that empirical part, we actually ran an online survey where we surveyed people about both their knowledge of the Fed and also their opinions about the Fed and who should be doing what sorts of policies.
Binder: So we had a whole set of different policies, and for each one we asked our survey respondents to say, "Who do you think should be most responsible for this policy area?" And they could answer, elected officials or the Fed, or other unelected officials or other, or they could say that they were not sure. And some of the policy areas we asked about were the Feds kind of explicit mandate. We asked about monetary policy, we asked about price stability, we asked about full employment. But we also asked about economic inequality, gender inequality, and climate change. And am I forgetting anything Christina? I think those were the main ones.
Skinner: You got it.
Binder: And what was really interesting was that there was just such a mix of opinion about who should be doing each of these things, even monetary policy. We had like half of people saying that the Fed should do monetary policy. But when it came to these areas that we were calling more activists, like economic inequality or even gender inequality or climate change, then we had a real mix of opinions and it was really different for different demographic groups. So for people with a college education, they were actually more supportive of having the Fed be most responsible for things like climate change and inequality, and gender issues, people without a college education, almost none of them wanted the Fed be responsible for those things.
Binder: Another interesting split was on the lines of where people got their news. So for people who got their news about the economy from social media, like Twitter, they also wanted the Fed to be more activist. And so it is sort of what you see if you're on econ Twitter a lot, like I am, you get the sense that, "Well, everyone seems to want the Fed to do this stuff, and so maybe it is legitimate." But that's just this narrow slice of the population. It's the college educated Twitter users who are not really the real world who want the Fed to be doing this. And like the Fed itself is on Twitter and presumably seeing all of this and they might feel they have more of a kind of general mandate from the public to be involved in these things.
Binder: But who they're really hearing from is this particular segment of the population who does want the Fed to do more. So we thought that what this tells us is, if the Fed starts to get more involved in, or even talk about being more involved in these sort of hot political issues, that really is going to polarize the Fed more because it'll be seen as doing sort of what the elites want it to do, right? What the highly educated people, what the Twitter users want it to do, but you have a lot of the public that doesn't actually want it to be doing that.
What was really interesting was that there was just such a mix of opinion about who should be doing each of these things, even monetary policy.
Beckworth: Well, that's interesting. And not terribly surprising that most people on Twitter want to see a more activist Fed. Sometimes I'll put a tweet out, that little snarky tweet, "If you go down this path, the Fed's going to also have to start worrying about tele events like nuclear war with China, an asteroid hitting earth, the next pandemic, a solar flare knocking out our grid." And I always get push back from that. But that it does speak to this question, legitimacy, what areas does the Fed go into and not, and Christina, you mentioned Paul Tucker in his book, and maybe you can weave this back into your ideas, your theories.
Beckworth: One of the things I remember from that book, it's a big book, but one of the big takeaways and I brought this up with other guests. Some of them agree, some pushed back, but. But his notion of legitimacy is that Congress can delegate power to an agency like the Fed, if there's broad consensus on it. Price stability being a good example, right? I mean, most people want price stability, but on questions that you've mentioned, like climate change, it's very, very divisive in this country, and he would say, that's not something you'd want to delegate to an agency. You need to have Congress deliberate on that. And is that how you view this as well, does this tie into your theory in a similar fashion?
Skinner: Yeah, I absolutely agree with Paul Tucker on that one and exactly right. And these are polarizing questions. And I think that the answer sort of arises naturally, which is to say that if they aren't polarizing and they were just sort of these clear issues where their social consensus, their issues came capable of being solved or determined through technocratic economic analysis, then Congress would in fact delegate to the Fed, but it hasn't. And it probably can't for that very reason because the constituents would hold their elected representatives accountable for that very issue. And more to the point of what Paul Tucker was talking about, this came up again to refer to this parliamentary inquiry that both Paul Tucker and I gave evidence in last April. And he pointed out, which I fully agree with in terms of the way that HM treasury had given the Bank of England, the so-called green mandate right to consider sustainability and the fashioning of its monetary policy.
Skinner: And that is entirely consistent with the UK's legal framework. So according to their framework, HM treasury can pursuant to this annual remit letter sort of tell the monetary policy commission what exactly to consider and it did that. But the issue that Paul Tucker rose, and I think was a good one, is that the Bank of England has been given this so-called green remit, but without any clear instructions as to how to decide what's green and what's brown, right? So that's a really clear example of delegating sort of a contested or an open-ended issue that isn't so obviously determined from a technocratic economic analysis. And so that discretion is really unhelpful to the Bank of England's independence, I think, so the argument goes.
Skinner: And I think you see, and this does connect back to what I was talking about in the Cato Conference, which is that there are areas where Congress has done something similar in regard to the Fed, and we may not have necessarily noticed it until now, right? So if you look at the dual mandate, for example, if you look at the legislative history of how employment found its way into the dual mandate, you can look back to the '40s, the post-World War experience. And it was really sort of a cornerstone of the presidential agenda to try and make the executive branch responsible for full employment.
Skinner: And that tracks through the Employment Act 1946, then through a bill, the Humphry-Hawkins Act when it was still a bill being debated, right? And essentially what you see in the back and forth when the bill is debated and the intervening period in which Congress amends the Federal Reserve Act gives the Fed a price stability mandate, and it also sort of tacks on this employment piece. And when you look at the context, it very much looks like a case where Congress has diverted what was an executive goal onto the Fed. And complicating things further is the fact that Congress gave the Fed both an employment arm to its mandate and a price stability arm, but it didn't give any instructions about how to prioritize those goals when they conflict.
Skinner: And so that I think has over time set the Fed up for vulnerability to populism, right? Because the Fed hasn't been given clear instructions, what's a primary mandate, what's a secondary mandate, or how to assess the trade offs there. The second example, I think you also see with financial stability. So the Fed doesn't have an explicit financial stability mandate. We might say that it has an implicit one, if we look at the Dodd-Frank Act, but again, Congress hasn't told the Fed how to define financial stability risk, how to come up with a definition. It actually gave that job to the FSAC. And so the point of all this is that without boundaries around mandates, especially those that trigger monetary policy action, or regulatory or supervisory decisions, the lack of boundaries from Congress when things become socially contested, or they become sort of these contested value judgments, that I think is a vulnerability to the Fed, to this form of populism that we've been discussing.
The issue that Paul Tucker rose, and I think was a good one, is that the Bank of England has been given this so-called green remit, but without any clear instructions as to how to decide what's green and what's brown, right? So that's a really clear example of delegating sort of a contested or an open-ended issue that isn't so obviously determined from a technocratic economic analysis. And so that discretion is really unhelpful to the Bank of England's independence, I think.
Beckworth: So let me play the devil's advocate here, Christina. So let's say I'm a progressive listening to this show and I'm like, "Yeah. Yeah. I hear you. Yeah. It's not legitimate, but this is our one chance. Biden won presidency, elections have consequences. We're swinging for the fences. We want to turn the Fed into a supercharged EPA." Why should this progressive worry about the long term consequences of swinging for the fences, or how could it come back maybe to maybe bite them in the rear if they pursue this line of thinking?
Skinner: Yeah. I mean, my answers to you so far have been pretty long, but I think this one's pretty short, what's good for the goose is good for the gander. And I think you politicize the Fed, then it's going to swing back and forth like a pendulum. Once presidents get a taste for using the power of the Fed to instantiate their policy agendas, that's going to be a difficult situation to walk back I think.
Beckworth: Yeah. Reason I worry about that for the very reason you've outlined is, again, 2022 Republicans are likely going to take over the house. And if they see the Fed as a very politicized institution they could get creative themselves and start imposing certain constraints on the Fed or push them in a certain direction. And I think that's something we want to be mindful of. I mean, one of the least, parent features of the Fed, I know it's not quite true, is its independence and we can debate what independence means. But the ability to have that independence to be technocratic is something that's defined of the Fed. And we jeopardize that if we take that chance.
Binder: I mean, if you're trying to push policies through the Fed, because you think this is your chance, otherwise this policy would not be enacted, but let's get the Fed to do it. What you're really saying is, "We know best. Our side knows best. We couldn't get this policy through the political process, but we went it through anyway, because we know best.” And that just really is going to exacerbate democratic discontent. People are going to rightly feel like they are not getting their interest represented. And there's again, the Bickerton and Accetti book, they have this quote where they say, "One of the consequences of technopopulism is individuals are bound to get a sense that political representation is being hollowed out, even if, or indeed precisely because political actors claim to represent the substantive interest of society as a whole, in a direct and unmediated way."
Binder: And that is what would happen, right? It's like, well, okay, climate change is bad, we should stop it. That's not a consensus, but that is right, so let's do it. And maybe like that does have a good outcome, but it's still going to just remove that sense of political representation. And like you said, it can swing the other way around once the Fed becomes subject then to even more and more pressure, right? Once you show that the Fed is willing to do more things like this, then whoever's in charge at the moment in is just going to ask the Fed to do different things and to do more things and give them more discretion so that they can do more.
I think you politicize the Fed, then it's going to swing back and forth like a pendulum. Once presidents get a taste for using the power of the Fed to instantiate their policy agendas, that's going to be a difficult situation to walk back...if you're trying to push policies through the Fed, because you think this is your chance, otherwise this policy would not be enacted, but let's get the Fed to do it. What you're really saying is, "We know best. Our side knows best. We couldn't get this policy through the political process, but we went it through anyway, because we know best.” And that just really is going to exacerbate democratic discontent.
Binder: But once they have more discretion, then they're going to be subject to even more pressure, right? The more, you want the Fed to do for you, the more discretion and power you have to give it. And the more discretion and power you have to give it, the more people go want the Fed to do stuff for them. So it's just going to keep ratcheting up and up.
Beckworth: That's interesting. So this populism pressures will just feed upon themselves and make the Fed, depending who's in power, swing one me or the other. So we want to be mindful of that. Christina, you mentioned how the Bank of England's been given this new mandate, this green remit mandate, but hasn't been given specifics, right?
Skinner: Right, right. So initially, so this was March of this year. 2021, I believe. So HMT in its annual remit letter to the monetary policy committee says, essentially we also want or expect you to consider environmental sustainability in the fashioning of your policy. So this has sort of become colloquially known as the green mandate, if you will. And I think the way it plays out is that, well, it can play out in a number of ways. But one thing that I was thinking about or looking at, especially when I was talking about it in the hearing is that, well, the Bank of England has a QE program also, it's called the Asset Purchase Facility. And unlike the Feds QE program, the Bank of England's Asset Purchase Facility buys a small proportion of corporate bonds.
Skinner: So that is an area where it would be able to implement its green mandate by thinking about, "Okay, we're buying this slice of corporate bonds as part of our Asset Purchase Facility, we want to buy green ones or a certain proportion of green ones," or et cetera. I think the Bank of England recently set out some criteria for how it was going to implement this new green mandate. So that, as I told the House of Lords, is I think a bit of an open door to politicization because it's not so clearly settled, what is green? What is brown and how that may mandate is going to interact with other mandates of the central bank, like it's financial stability mandate for example, right?
Skinner: So if you start sort of having the central bank buying certain green bonds, that's going to create what's called a greenium, and you're going to incentivize the market to sort of pile in behind certain assets that have the imprimatur of the central bank, does pose sort of bubble hurting risks? We don't know. So I think all of these things are going to be a bit delicate for the independence or at least the sort of appearance of politicization of the central bank.
Beckworth: Yeah. It's interesting you mentioned what's green and what's brown? I mean, even among people who think about these issues, there's a debate over is nuclear energy green, is it truly green? And some people advocate for that as part of the solution, others do not. And so I'd imagine, even if you go down this path, it's just going to further politicize what the Fed has to deal with. Okay. Well, let's move on to the paper that you wrote together, “Laboratories of Central Banking,” and I mentioned it earlier, where you did some fascinating work where you track the literature from the Feds. So maybe you can give me an overview of what you did in the paper.
Laboratories of Central Banking
Skinner: I'll introduce where we were heading with this Carola, and then maybe you can talk about our findings. So I think coming full circle to the beginning of our conversation, this paper is basically a deep dive into what we perceived to be a source of populism, that's maybe internal to the system. So we noticed and we were talking about the fact that reserve bank research papers appear to be increasingly covering topics that seem to be pretty far outside the mandate of the Federal Reserve Board. So on these various topics of climate change and equality diversity, sometimes combining these topics together. And so we said, well, there's a conundrum here because we want to balance intellectual freedom and experimentation that's inherent to the system itself, and the risk to politicization of the system on the other hand.
Skinner: So we sort of first wanted to test our hypothesis about whether the research function of the regional reserve banks had become sort of further and further outside of the mandate of the board. And then we also realized that there was no comprehensive treatment of where within the law, the research function of the reserve banks sits. So again, we sort of combined our legal and economic forces to come up with the legal story and the empirical story. So I don't know, Carola, maybe to tell the listeners what we found and then if there's time, I can tell you about the legal backstory.
Binder: So we decided to do this empirical analysis of the research that's done by the reserve banks. And to do this, we had to put together our own data set. We had a really great team of RAs, I'll see if I can name them all. I think it's, Iteh, James, James, Rishab, Shawnee and Andrew. We had seven RAs. And they went through almost 5,000 working papers that were published by the reserve banks that started, so since 2006 to the present. There was 4,715 working papers, and they went to the reserve bank websites and they recorded the title, the publication date, and other key information about each paper. In particular, the topics of the paper. So we recorded whether the papers included certain JEL codes, as in, Journal of Economic Literature codes that code the topics of papers. And also whether on reading the papers, the RAs noted that they had certain topics like inequality, climate or global warming, gender or race as one of the topics of the papers.
Binder: So again, that was based on the JEL code and based on just their reading of the paper itself. So with this new data set, we were able to see how the research interests of the reserve banks vary across the banks and then how they vary over time. And as we were kind of expecting, and as you might expect, all of these topics, these activist topics that we were coding for have increased quite significantly over time just from 2005 onwards. So a big increase starting around 2014 is when we see the really big upturn in these. Where for inequality, for example, that was about 5% of papers in 2006, 2007, and more than 15% of papers in 2021.
Binder: There was also a lot of differences across the Federal Reserves and what they focus on. And again, you would expect that these are basically different research teams and they might have a geographic reason for studying a particular topic, or when one researcher is interested in a topic, they tend to hire other researchers who are also interested in the topic, but those are some of our main findings. Now that we have this data set, we're probably going to do some more with it, but that's what we showed so far.
Beckworth: Yeah. I looked at the charts, you create some nice time series charts and they're all turning upwards. So one of the implications then, and what you show in those charts as you mentioned is that there a growing share of the publication output are these issues, climate change, gender inequality, race. What that implies to me then is that traditional macro research is a declining share of the publications, is that a right interpretation?
Binder: Yes. It's a little harder to really measure that because, well, almost any paper you could sort of classify it as having traditional macro topics in it. But yeah, so it's hard to say whether this means there's a less of a focus on employment or on inflation. We mostly just focus on the increasing share of these other topics.
Beckworth: Yes. They could overlap, but at least it suggests that the total share of pure papers on inflation targeting or financial stability. Those probably are losing at least some ground. But as you said, it's hard to define that from the data. All right, Christina, tell us the legal side of this.
Skinner: Yeah. So it's a long story, we could probably go another hour. But I think the big picture story that we uncovered, and what's fascinating is you really have to look at the internal policy memos that are on FRASER, the FRASER, to piece together the story. Because there's nowhere in the Federal Reserve Act, does it really explicitly talk about research at the reserve banks. It looks like initially the research function got going as sort of an incidental power that's necessary to carry out the business of banking. And then what we saw in the beginning of the Federal Reserve system, the research function of the banks appeared to be sort of a subset of the board. So prior to 1935, there was a position that was the agent and the chairman of the board.
Skinner: And this director who was both chairman and agent was the sort of head of the research function of the reserve banks. And it looked like the board, the agent was sort of an ambassador from the reserve banks to the board. And it looked like the board essentially asked the agent, "Okay, set up this research function at the reserve banks, so that we can have a steady stream of information, mostly statistical information. And this is going to help us develop our role as the technocratic economic central bank." Now in 1935, there's a paradigm shift with Marriner Eccles. He changed so much about the system, including the research function. And after that point, the role of chairman and agent at the reserve banks becomes basically a ceremonial one. And the research function is shifted to the auspices of the newly created role of president of the regional reserve banks.
Skinner: So after 1935, the research function is sort of formally cut free from the board, so to speak. But what's interesting, and I'll just summarize it at a high level, is that you see sort of a number of different policy documents, that are internal board policy documents from the beginning of the research function in the early days of the system through really the 1950s. That demonstrates that the board was always actually concerned about the public appearance of research, about the potential for controversy, about the extent to which it appeared that reserve bank research would be trying to sway public opinion on controversial matters, that's basically a direct quote. And the board always tried to hold the reins pretty tightly around the budget. It retained for itself the right to approve the messaging in various pieces of research.
Skinner: So it's basically an interesting point of departure that you have this system that was first sort of explicitly considered to be within the board, then it's not, but the board still keeps a pretty close watch so that the messaging of the system is pretty coherent and that it doesn't appear to be unduly controversial, or make the system seem like it's biased on any one issue or another. And then around 1960, the internal documents go silent, and as far as we can put together with the use of circumstantial evidence, I think perhaps the real paradigm shift comes with the passage of the Community Reinvestment Act because that sort of deputize the reserve banks to create a community development function that then in turn served as sort of the basis, the beachhead for expanding the research function, and then it goes from there.
Skinner: So that's pretty much the story that we could piece together. And the upshot of all of it is that the research function is not clearly defined in law, going back to our conversation about broad mandates. And it looks like if at the end of the day, it may well just be a governance issue. So if the board wants to have more involvement in the reserve bank research function, it certainly could as a matter of law and it would seem to be consistent at least with prior reserve bank policy. And I think we sort of are a bit normatively agnostic at the end of the paper, because we are concerned with this balance between experimentation and intellectual freedom and the potential for politicization.
Skinner: So we try and stress that if anything, maybe the board should be concerned about this problem of signaling and expectation setting. So if reserve banks are engaged in a bunch of research that sits pretty far outside the Fed’s mandate to act, does this complicate Fed communications? Because most Americans and Fed Watchers abroad probably don't appreciate that the reserve banks can't really set policy for the board. So it might be that this kind of research is going to create confusion about what the Fed can do legally, or what position it takes.
We are concerned with this balance between experimentation and intellectual freedom and the potential for politicization. So we try and stress that if anything, maybe the board should be concerned about this problem of signaling and expectation setting. So if reserve banks are engaged in a bunch of research that sits pretty far outside the Fed’s mandate to act, does this complicate Fed communications?
Beckworth: That is fascinating. So this departure from what was very cautious and focused has grown quite a bit. And the concern here is that it sends a signal that the Fed is becoming very partisan, very politicized. I wonder also if it sends a signal to the broader profession. So Larry White had a paper, I think in 2005 where he noted like the Federal Reserve system in its entirety is a huge part of the job market for economists, right? They hire and they employ a lot, and a lot of economists. As a result what happens at the Fed can at some level dictate what happens to the broader profession in terms of research topics. So I wanted to the extent that the Fed is going down this path, it sends a signal to other younger researchers in the pipeline. This is where you need to do your work.
Beckworth: This is where you're going to get a job at the Federal Reserve. And along these lines, there was a recent paper out called “Fifty Shades of QE,” kind of a play on a movie that came out a few years ago. But what it found at all the central banker's research on QE showed a very strong effect where the academic showed a lesser of effect. And I guess the implication here is the Fed continues to go down a path where it takes on these topics, it could influence what's done in academia. But I don't know if you guys have any thought on thoughts on that.
Binder: Well, that inherently wouldn't be that bad, right? I mean, these kinds of topics that are so politically salient and so socially important are the topics that we want academics to be researching. So I think it's certainly a good thing to have economists studying climate change and inequality and things like that. So I'm not too worried that this just influences more academics to research these topics. That would actually, I think be an upside. I think the issue is that people don't exactly know that much about the Fed, so they see they open the Fed's, if they happen to go to the Fed website, the website of one of these reserve banks, and what they see is just links to all this research on these topics.
Binder: They understand is that is what the Fed is doing. That's the job of the Fed, that this is the Fed's opinion, even though all the papers are going to say on them, this is not the official opinion of the Fed. I mean, people aren't going to read that kind of fine print. So our bigger worry was about this politicizing, the Fed, not about influencing what the economics profession is researching.
Beckworth: Yeah. That's a fair point. We care about climate change. We want Congress to address it. And if academics are providing great insights, all the more power to them. So this is ultimately about what's happening in the Fed and what's going on there.
Beckworth: This has been a fascinating conversation and an important one. And again, we encourage our listeners to check out their papers. We'll provide the links. Also, if you may go see their presentations at the Cato Monetary Policy Conference, the videos are online. Carola, I want to ask you a question real quick since I've been in the middle of these debates on whether, is it team transitory, team permanent is inflation here for good. And one of the sources that people go look at when they're saying that inflation is becoming a problem, is becoming an anchored. They look at consumer expectations. If I look at like bond market, it's a little more reassuring, but consumer expectations seem to be coming anchored to some extent. And I've kind of dismissed them, "Oh, they're tracking gas prices or commodity prices." But what is your sense on this? So you've done extensive work on consumer inflation expectations, how do you interpret what's going on?
Thoughts on Recent Inflation
Binder: Right. The majority of my research has been about consumer inflation expectations and I've mostly studied the Michigan survey and the New York Feds survey of consumer expectations. And I've also run a couple of surveys myself. And I think you have to be really careful when interpreting this survey data. Often what you see reported like in the news, or you'll see a chart and it'll say, "Oh, consumer inflation expectations have risen from 3% to 4%," or, "Have risen from 4% to 5%." And you just see one number, and it's usually the median. But what's important to remember is that there's a huge spread around that median. People give all kinds of numbers when you ask them for their inflation expectations. Some people will say a number like three or 4%, but a lot of people actually give a lot more extreme values there.
Binder: In part that might have to do with not understanding what they're being asked of in the survey, or just really not having a well formed expectation of inflation, because they don't really understand the concept itself. So that said, the median inflation expectation on consumer surveys has risen quite a lot in recent months as inflation itself has risen. The shorter run inflation expectations have risen more than the longer run expectations, but the longer run expectations have also risen. And I have some mark where I construct measures of consumers, uncertainty about inflation and those measures have also risen. So I think what we're seeing is, well, most people are not aware of the Fed's inflation target, average inflation targeting, or just plain inflation targeting, people just haven't heard of it. They don't even know that that is what the Fed does. So usually they more or less can ignore inflation.
Binder: But when they do start seeing these major price rises across a different variety of things they buy, then they do get the sense that yes, there is inflation out here. And so it does get worked into their expectations. What I think will be really telling is, okay, once inflation does start to slow down, will we see this reverse or not? That's going to be the real big thing to watch, right? So if inflation expectations are high now, because inflation is high now, but they just go back to normal whenever inflation goes down, then that's a really good sign. If they remain elevated and uncertainty remains really high, then that's a much worse sign, right?
Binder: Because when people are forming their inflation expectations, they really are relying on their memories and relying on what they've learned from the past. So before this recent bout of inflation, a lot of people didn't really have strong memories of inflation. I have not lived through any major inflation until now. And a lot of people also haven't so they didn't have anything to kind of form those inflation expectations based off of. But I have a recent paper that I just published with Gillian Brunet and we actually studied inflation expectations and consumption behavior in 1951 during the start of the Korean War.
Binder: And the really interesting thing there is people still had strong memories of World War II. And in World War II, not only was there, well, there was inflation, but also like now, there were shortages, there was scarcity, and there were these kind of self-fulfilling fears of scarcity because people in the Korean War, when it started, they rushed out and bought the things that had been rationed during World War II. They went out and, and bought sugar because they couldn't get sugar during World War II, and that caused there to be some sugar shortages. So people use their recent past as kind of a model for what they will expect to happen in the future. So I think we're still at this point where I don't know exactly what's going to happen.
Binder: If the inflation turns out to be relatively transitory, the Fed gets it under control really quickly and people see that, "Okay, there was this bit of inflation, but it's under control," then that's great. And maybe that actually helps anchor expectations, the next time people see inflation, they know, "Okay, well sometimes there's a supply shortage," or, "Sometimes some kind of shock happens, it causes some inflation, but then the Fed gets it back under control." That's exactly what we want to happen. But if people instead learn, "Oh my gosh, prices rise, and I don't get as much of wage rise and inflation really hurt me." And then they're sort of on the lookout for inflation all the time, that's when we get into a lot of trouble, where you could get expectations becoming anchored. We're just not at the point yet to have it be clear, which one of those is happening.
Beckworth: Okay. Well, this actually ties back into our main conversation today because part of believing the Fed can do its job is not to be politicized, have legitimacy, stick to the Fed's core mandate, priceability full employment. So I think that's a key part of the story here and they tie nicely together. Well with that, our time is up. Our guests today have been Carola Binder and Christina Skinner. Thank you both for coming back on the show.
Binder: Thank you.
Skinner: Thanks for having us.
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