President Trump’s nomination of Stephen Moore and Herman Cain (full disclosure, both are friends and Moore an occasional professional colleague) to the board of governors of the Federal Reserve has become something of a cause célèbre in Washington.
Moore’s and Cain’s attackers outnumber their defenders. But their defenders have the better argument.
The Cain/Moore mutiny of the Establishment is a perfect microcosm of the existential crisis of modernity. Canadian public intellectual John Raltson Saul called this persistent existential crisis, in his eponymous book, Voltaire’s Bastards. (Penguin Books, 1992.)
That’s shorthand for a misplaced veneration of reason. Venerated reason has not performed nearly as well in practice as in theory. Better call Saul:
The official Left would put most of our problems down to uncontrolled self-interest, as if they still had a clear idea of how to harness self-interest for the general good. The official Right would shrug its shoulders manfully, that is to say cynically, as if to imply that reality is tough. But manful cynicism is probably a disguised form of confused helplessness. And none of these contradictions have anything to do with reality.
We are now more than four and a half centuries into an era which our obsession with progress and our servility to structure have caused us to name and rename a dozen times, as if this flashing of theoretically fundamental concepts indicated real movement. The reality is that we have not moved beyond the base ideas of the sixteenth century which, for want of any better description, should be called the concepts of reason. This Age of Reason will soon have been with us for 500 years. With each passing day more ideas, structure and beliefs are hung upon the fragile back of these few concepts.
And yet, even in their early days, they were not ideas of great breadth. What’s more, from birth they were based upon an essential misunderstanding — that reason constituted a moral weapon, when in fact it was nothing more than a disinterested administrative method. That fundamental error may explain reason’s continuing force, because centuries of Western elites have been obliged to invent a moral direction where none existed.
Knowledge, of course, was to be the guarantee of reason’s moral force — knowledge, an invincible weapon which would ensure that society was built upon considered and sensible actions. But in a world turned upon power through structure, the disinterested consideration of knowledge simply couldn’t hold and was rapidly transformed into our obsession with expertise. The old civilization of class was replaced by one of castes — a highly sophisticated version of corporatism. Knowledge became the currency of power and as such as retained. This civilization of secretive experts was quite naturally obsessed not by the encouragement of understanding but by the providing of answers.
This obsession with the providing of answers calls to mind an infamous anecdote about Montagu Norman, the first celebrity central banker, as recalled in Jim Grant’s review of Till Time’s Last Sand, a history of the Bank of England, from its founding in 1694 to the financially turbulent present:
“We have appointed you as our economics adviser,” Montagu Norman, the longest-serving governor of the Bank of England, said to a brainy new hire in the early 1930s. “Let me tell you that you are not here to tell us what to do, but to explain to us why we have done it.”
Here within the microcosm of Trump’s announcement of Moore and Cain the Voltaire’s Bastards syndrome manifests in two main criticisms. The first horrified indictment is that these candidates would undermine the independence of the Fed. The second is that they lack sufficient academic qualifications for the job.
Neither criticism holds up under scrutiny.
The independence of the Fed is one of the most durable tropes in Washington. It is also almost pure pretense. As Steven Solomon wrote in The Confidence Game: How Unelected Central Bankers Are Governing the Changed World Economy (Simon & Schuster, 1995):
Although they strained to portray themselves as nonthreatening, nonpartisan technician-managers of the status quo, central bankers, like proverbial Supreme Court justices reading election returns, used their acute political antennae to intuit how far they could lean against the popular democratic winds. “Chairmen of the Federal Reserve,” observes ex-Citibank Chairman Walter Wriston, “have traditionally been the best politicians in Washington. The Fed serves a wonderful function. They get beat up on by the Congress and the administration. Everyone knows the game and everyone plays it. But no one wants their responsibility.”
This claim of Fed independence has, to cite Saul, nothing to do with reality. It’s just a shibboleth of a misplaced veneration of what passes for rationality, a rationality that has failed for a generation to contribute to sustained robust equitable prosperity.
When not in the grip of partisan frenzy, the left, the right, and the center (Wriston) actually agree on this point. As a center-left commentator for the Washington Post, Matt O’Brien, trenchantly wrote in “Yes, the Federal Reserve has enormous power over who is president”:
The arc of the political universe is long, but it bends towards monetary policy.
That’s the boring truth that nobody wants to hear. Forget about the gaffes, the horserace, and even the personalities. Elections are about the economy, stupid, and the economy is mostly controlled by monetary policy. That’s why every big ideological turning point — 1896, 1920, 1932, 1980, and maybe 2008 — has come after a big monetary shock.
Think about it this way: Bad monetary policy means a bad economy, which gives power back to the party that didn’t have it before. And so long as the monetary problem gets fixed, the economy will too, and the new government’s policies will, whatever their merits, get the credit. That’s how ideology changes.
Center-right John Tamny, editor of Real Clear Markets, argues that “Presidents get the dollar they want. Always.” At RCM:
The Carter and Bush presidencies weren’t certain failures as much as the dollar policies from both administrations ensured economic malaise. What’s crucial is that all this could have been avoided. Presidents get the dollar they want. Always. Will President Trump realize this before it’s too late?
A second knock on Moore and Cain is that they lack the professionalism requisite to serve. To provide some context let’s take a good look at the Fed’s own track record.
Ylan Q. Mui, then writing for the Washington Post, wrote in “Why nobody believes the Federal Reserve’s forecasts”: “Even the government’s official budget forecasters are dubious of the Fed’s own forecast.”
This was a reprise of a note she had previously sounded,“Is the Fed’s crystal ball rose-colored?” “The big question is whether Fed officials can get it right after years in which they have regularly predicted a stronger economy than the one that materialized.”
The Fed’s economic predictions are consistently wrong. Thus, what can one really expect of policy based on those predictions? It is not wrong of the president to express concern that monetary policy is too tight and strangling economic growth.
Mui was not merely exercising journalistic cheek. In the New York Fed’s own flagship blog, Liberty Street Economics, we find — speaking for themselves and not the Fed — an admirably candid observation by an assistant vice president in the Federal Reserve Bank of New York’s Research and Statistics Group, Marco Del Negro, Wharton Ph.D. student Raiden Hasegawa, and University of Pennsylvania professor of economics Frank Schorfheide, “Choosing the Right Policy in Real Time (Why That’s Not Easy)”:
Model uncertainty is pervasive. Economists, bloggers, policymakers all have different views of how the world works and what economic policies would make it better. These views are, like it or not, models. Some people spell them out in their entirety, equations and all. Others refuse to use the word altogether, possibly out of fear of being falsified. No model is “right,” of course, but some models are worse than others, and we can have an idea of which is which by comparing their predictions with what actually happened.…
In the end, we have shown that policy analysis in the very oversimplified world of DSGE models is a pretty difficult business. Contrary to what it may sometimes appear from listening to talking heads, deciding which policy is best is very rarely a slam dunk.
This can only be interpreted as an admission of the fundamental unreliability of the Fed’s core analytic. Bravo for the dose of honest candor!
Prof. Reuven Brenner has called our current system to account:
[M]acro-economics is now [astrology’s] modern incarnation: Only instead of stars, macro-economists look at “aggregates” gathered religiously by governments’ statistical agencies — never mind if the country has a dictatorial regime, be it left, right or anything in between, or has large black markets, as Italy and Greece do, where tax evasion has long been the main national sport. So let us first forget about this “macro” stuff, whose beginnings are almost a century old, and offer a simple alternative for shedding light on the situation today and on possible solutions, hopefully demolish this modern pseudo-“science” once and for all.”
No less than Hayek, in his Nobel Prize acceptance speech titled The Pretence of Knowledge, acidly criticized the economics profession for something he called “scientism,” meaning emulating the style but not the substance of the natural sciences. The Fed, with its many hundreds of PhD economists on staff is operating a pseudoscientific model.
This is the sine qua non of the Voltaire’s Bastards syndrome.
Is there a problem with this pretense? Jamie Dimon, Chairman and CEO of JP Morgan Chase, recently went on record as proclaiming that the U.S. economy should have grown 40% in the last decade, not 20%. The policies emanating from the Fed, with all of its impressive expertise, have not gotten the growth job done. We’re stuck in a “Little Dark Age” of economic stagnation.
This upsets President Trump. As well it should.
Whether or not one accepts Moore’s commodities-index target (I do not) or Cain’s belief in the gold standard (I do), their appointment and confirmation would be consistent with President Trump’s reported desire for better equitable prosperity.
Moore calls himself a “growth hawk.” Herman Cain is a sure-enough pro-prosperity supply-sider. Bring it on.
Confirming Stephen Moore and Herman Cain would not undermine the Fed’s independence. There’s nothing innately partisan about equitable prosperity. Some of prosperity’s greatest champions, such as the late President John F. Kennedy and the former U.S. Senator Bill Bradley, have been Democrats. President Reagan was a Democrat until his party left him.
So was I.
Confirmation of Moore and Cain would position two vital voices to challenge the Fed to up its game by adopting a monetary rule better calculated to restore equitable prosperity than its current, beleaguered “Voltaire’s Bastards” louche practices. The United States Senate should not flinch from confirming Stephen Moore and Herman Cain to the Federal Reserve Board.
© 2019 by Ralph Benko, the principal of the public affairs firm of ralphbenko.com, founded the Prosperity Caucus, was the lead co-editor of the most esteemed modern translation of Copernicus’s Essay on Money, and serves as Editor-in-Chief of the Supply-Side Blog published under the auspices of the Committee to Unleash Prosperity on which Stephen Moore serves.