Sarah Binder & Mark Spindel on The Myth of Independence

Born out of crisis a century ago, the Federal Reserve has become the most powerful macroeconomic policymaker and financial regulator in the world. The Myth of Independence traces the Fed’s transformation from a weak, secretive, and decentralized institution in 1913 to a remarkably transparent central bank a century later. Offering a unique account of Congress’s role in steering this evolution, Sarah Binder and Mark Spindel explore the Fed’s past, present, and future and challenge the myth of its independence.

Why did you write this book?

We were intrigued by the relationship of two powerful institutions that are typically studied in isolation: Congress, overtly political and increasingly polarized, and the Federal Reserve, allegedly independent, born of an earlier financial panic and the world’s most powerful economic policy maker. The economic conditions that created and sustain America’s century old central bank have been well studied. Scholars and market participants have spent considerably less time analyzing the complex political forces that drove the Fed’s genesis and its rise to prominence. Our research challenges widely accepted notions of Fed independence, instead arguing that the Fed sets policy subject to political constraints. Its autonomy is conditioned on economic outcomes and robust political support. In the long shadow of the global financial crisis, our research pinpoints the interdependence of two powerful policy-making institutions and their impact on contemporary monetary politics.

What does history teach us about contemporary monetary politics?

Probing the Fed’s history affords us a window onto the political and economic constraints under which the Fed makes monetary policy today. We draw two key conclusions about contemporary monetary policy from our study of the Fed’s development.

First, the history of the relationship between Congress and the Fed reveals a recurring cycle of economic crisis, political blame, and institutional reform. When the economy is performing well, Congress tends to look the other way, leaving the Fed to pursue its statutory mandate to boost jobs and limit inflation. When the economy sours, lawmakers react by blaming the Fed and then counter-intuitively often giving the Fed more power. Legislative and central bank reactions in the wake of the most recent financial crisis fit this recurring theme. Even after blaming them, Congress further concentrated financial regulation in the Fed’s Board of Governors. Understanding the electoral dynamics that shape Congressional reactions helps to explain the puzzling decision to empower the Fed in the wake of crisis.

Second, economists and central bankers often argue that the Fed has instrument, but not goal, independence: Congress stipulates the Fed’s mandate but leaves the central bank to choose the tools necessary to achieve it. Our historical analysis suggests instead that Congress shapes both the monetary goals and tools. Creating and clipping emergency lending power, imposing greater transparency, influencing adoption of an inflation target—these and other legislative efforts directly shape the Fed’s conduct. Even today, monetary policy remains under siege, as lawmakers on the left and right remain dissatisfied with the Fed’s performance in driving the nation’s economic recovery from the Great Recession.

What new light do you shed on the notion of central bank independence?

Placing the Fed within the broader political system changes our understanding of the nature and primacy of central bank independence.

First, economists prize central bank independence on grounds that it keeps inflation low and stable. However, we show that ever since the Great Depression, Congressional majorities have typically demanded the Fed place equal weight on generating growth and controlling inflation—diminishing the importance of central bank autonomy to lawmakers. Moreover, we demonstrate that the seminal Treasury-Fed Accord of 1951—a deal that most argue cemented the Fed’s independence—tethered the Fed more closely to Congress even as it broke the Fed’s subordination to the Treasury.

Second, prescriptions for central bank independence notwithstanding, fully separating fiscal and monetary policy is complicated. During the Fed’s first half-century, fiscal policy was monetary policy. The Fed underwrote U.S. government borrowing, either willingly or unwillingly enabling the spending objectives of the executive and legislative branches. Even after the 1951 Fed-Treasury Accord, macro-economic outcomes have played a determinative role in shaping U.S. fiscal policy. And most recently, the Fed’s adoption of unconventional monetary policy in the wake of the financial crisis pushed interest rates to zero and ballooned the Fed’s balance sheet—leading many Fed critics to argue that the Fed had crossed the line into Congress’s fiscal domain. Importantly, even strict proponents of monetary independence recognize that exigent conditions often demand collaboration between the central bank and government, complicating monetary politics.

Third, the myth of Fed independence is convenient for elected officials eager to blame the Fed for poor economic outcomes. In fact, Congress and the Fed are interdependent: the Fed operates very much within the political structure in Washington. The Federal Reserve Act—the governing law—has been consistently reopened and revised, particularly after extraordinary economic challenges. Each time, Congress centralizes more control in the Fed’s Washington-based Board of Governors, in exchange for more central bank transparency and congressional accountability. Because Fed “independence” rests with Congress’s tolerance of the Fed’s policy performance, we argue that the Fed earns partial and contingent independence from Congress, and thus hardly any independence at all.

How does intense partisan polarization in Washington today affect the Fed?

In the aftermath of the global financial crisis, like most national institutions, the Federal Reserve has been caught in the cross hairs of contemporary partisan polarization. Politicians of both stripes call for changes to the governance and powers of the Fed. Most prominently, we see bipartisan efforts to audit Federal Open Market Committee (FOMC) decisions. On the right, a vocal GOP cohort demands an unwinding of the Fed’s big balance sheet and a more formulaic approach to monetary policy. On the left, Democrats want greater diversity on the rosters of the Fed’s regional reserve banks. With the 2016 elections delivering government control to Republicans, prospects for reopening the Federal Reserve Act are heightened.

Several vacancies on the Board of Governors give President Trump and Republican senators another opportunity to air grievances and exert control. Trump inherits a rare opportunity to nominate a majority of members to the FOMC, including the power to appoint a new chair in early 2018 should he wish to replace Janet Yellen. Will he turn to more traditional monetary “hawks,” who seek to rollback crisis-era policies, thus tightening monetary policy? Or will Trump bend towards a more ideologically dovish chair, trading some inflation for a pro-growth agenda?

Washington leaves a large—and politicized—mark on the Federal Reserve. The Myth of Independence seeks to place these overtly political decisions into broader, historical perspective, exploring how the interdependence of Congress and the Federal Reserve shapes politics, the economy and financial markets. As Ben Bernanke expressed, “absent the support of some future White House, although it might be difficult to get passed and signed legislation that poses a serious challenge to the basic powers of the Fed, it unfortunately would not be impossible.”

BinderSarah Binder is professor of political science at George Washington University and senior fellow at the Brookings Institution. Her books include Advice and Dissent and Stalemate. Mark Spindel has spent his entire career in investment management at such organizations as Salomon Brothers, the World Bank, and Potomac River Capital, a Washington D.C.–based hedge fund he started in 2007.

James Q. Whitman: Why the Nazis studied American race laws for inspiration

Hitler's American ModelOn 5 June 1934, about a year and half after Adolf Hitler became Chancellor of the Reich, the leading lawyers of Nazi Germany gathered at a meeting to plan what would become the Nuremberg Laws, the centrepiece anti-Jewish legislation of the Nazi race regime. The meeting was an important one, and a stenographer was present to take down a verbatim transcript, to be preserved by the ever-diligent Nazi bureaucracy as a record of a crucial moment in the creation of the new race regime.

That transcript reveals a startling fact: the meeting involved lengthy discussions of the law of the United States of America. At its very opening, the Minister of Justice presented a memorandum on US race law and, as the meeting progressed, the participants turned to the US example repeatedly. They debated whether they should bring Jim Crow segregation to the Third Reich. They engaged in detailed discussion of the statutes from the 30 US states that criminalised racially mixed marriages. They reviewed how the various US states determined who counted as a ‘Negro’ or a ‘Mongol’, and weighed whether they should adopt US techniques in their own approach to determining who counted as a Jew. Throughout the meeting the most ardent supporters of the US model were the most radical Nazis in the room.

The record of that meeting is only one piece of evidence in an unexamined history that is sure to make Americans cringe. Throughout the early 1930s, the years of the making of the Nuremberg Laws, Nazi policymakers looked to US law for inspiration. Hitler himself, in Mein Kampf (1925), described the US as ‘the one state’ that had made progress toward the creation of a healthy racist society, and after the Nazis seized power in 1933 they continued to cite and ponder US models regularly. They saw many things to despise in US constitutional values, to be sure. But they also saw many things to admire in US white supremacy, and when the Nuremberg Laws were promulgated in 1935, it is almost certainly the case that they reflected direct US influence.

This story might seem incredible. Why would the Nazis have felt the need to take lessons in racism from anybody? Why, most especially, would they have looked to the US? Whatever its failings, after all, the US is the home of a great liberal and democratic tradition. Moreover, the Jews of the US – however many obstacles they might have confronted in the early 20th century – never faced state-sponsored persecution. And, in the end, Americans made immense sacrifices in the struggle to defeat Hitler.

But the reality is that, in the early 20th century, the US, with its vigorous and creative legal culture, led the world in racist lawmaking. That was not only true of the Jim Crow South. It was true on the national level as well. The US had race-based immigration law, admired by racists all over the world; and the Nazis, like their Right-wing European successors today (and so many US voters) were obsessed with the dangers posed by immigration.

The US stood alone in the world for the harshness of its anti-miscegenation laws, which not only prohibited racially mixed marriages, but also threatened mixed-race couples with severe criminal punishment. Again, this was not law confined to the South. It was found all over the US: Nazi lawyers carefully studied the statutes, not only of states such as Virginia, but also states such as Montana. It is true that the US did not persecute the Jews – or at least, as one Nazi lawyer remarked in 1936, it had not persecuted the Jews ‘so far’ – but it had created a host of forms of second-class citizenship for other minority groups, including Chinese, Japanese, Filipinos, Puerto Ricans and Native Americans, scattered all over the Union and its colonies. American forms of second-class citizenship were of great interest to Nazi policymakers as they set out to craft their own forms of second-class citizenship for the German Jewry.

Not least, the US was the greatest economic and cultural power in the world after 1918 – dynamic, modern, wealthy. Hitler and other Nazis envied the US, and wanted to learn how the Americans did it; it’s no great surprise that they believed that what had made America great was American racism.

Of course, however ugly American race law might have been, there was no American model for Nazi extermination camps. The Nazis often expressed their admiration for the American conquest of the West, when, as Hitler declared, the settlers had ‘shot down the millions of Redskins to a few hundred thousand’. In any case extermination camps were not the issue during the early 1930s, when the Nuremberg Laws were framed. The Nazis were not yet contemplating mass murder. Their aim at the time was to compel the Jews by whatever means possible to flee Germany, in order to preserve the Third Reich as a pure ‘Aryan’ country.

And here they were indeed convinced that they could identify American models – and some strange American heroes. For a young Nazi lawyer named Heinrich Krieger, for example, who had studied at the University of Arkansas as an exchange student, and whose diligent research on US race law formed the basis for the work of the Nazi Ministry of Justice, the great American heroes were Thomas Jefferson and Abraham Lincoln. Did not Jefferson say, in 1821, that it is certain ‘that the two races, equally free, cannot live in the same government’? Did not Lincoln often declare, before 1864, that the only real hope of America lay in the resettlement of the black population somewhere else? For a Nazi who believed that Germany’s only hope lay in the forced emigration of the Jews, these could seem like shining examples.

None of this is entirely easy to talk about. It is hard to overcome our sense that if we influenced Nazism we have polluted ourselves in ways that can never be cleansed. Nevertheless the evidence is there, and we cannot read it out of either German or American history.Aeon counter – do not remove

James Q. Whitman is the Ford Foundation Professor of Comparative and Foreign Law at Yale Law School. His books include Harsh Justice, The Origins of Reasonable Doubt, and The Verdict of Battle. He lives in New York City. His forthcoming book, Hitler’s American Model, is out in March from Princeton.

This article was originally published at Aeon and has been republished under Creative Commons.

What do We Really Want in a President?

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by George C. Edwards III

It is only natural that citizens focus on the traits of candidates during a presidential election. After all, why do we hold an election if it does not matter who wins? One answer is that candidates support different policies. Presidents must do more than aspire to prosperity and peace, however. They also have to govern.

It is safe to stipulate that everyone wants the president to be honest, intelligent, strong, empathetic, and balanced. Most candidates claim to possess such traits, and, in truth, many of them do. What about political skills and knowledge, traits necessary for governing effectively? These dimensions of candidates receive much less attention than, say, integrity, but they are essential for successful leadership. Just what are the essential leadership traits and skills?

Understanding the Potential of Leadership

Successful leadership is not the result of the dominant chief executives of political folklore who reshape the contours of the political landscape, altering their strategic positions to pave the way for change. The evidence is clear that presidents rarely, if ever, mobilize the public behind their policies in order to pressure Congress to pass their initiatives. Nor do they convince many members of the legislature to switch from opposition to support of White House proposals.

Rather than creating the conditions for important shifts in public policy, effective leaders are facilitators who work at the margins of coalition building to recognize and exploit opportunities in their environments. When the various streams of political resources converge to create opportunities for major change, presidents can be critical facilitators in engendering significant alterations in public policy.

It follows that recognizing and exploiting opportunities for change—rather than creating opportunities through persuasion—are essential presidential leadership skills. To succeed, presidents have to have the analytical insight necessary to identify opportunities for change in their environments carefully and orchestrate existing and potential support skillfully. Successful leadership also requires that the president have the energy, perseverance, adaptability, and resiliency to take full advantage of opportunities that arise.

Knowledge and Temperament

We hear from some quarters that presidents do not require a mastery of the details of public policy. All they need is able and knowledgeable advisors. Although every chief executive certainly relies on such aides, expert advisors are not sufficient to produce quality decisions.

Presidents need to possess detailed knowledge of the issues with which they will deal. They require information about both public problems and policies, including tangible details, to construct a necessary frame of reference for decision making. How else can they effectively evaluate options and ask probing questions? How else can they sensibly choose among options?

It also matters whether the president has correctly identified a problem. If you think the Chinese are manipulating their currency to the detriment of American jobs, you may ask your advisors to formulate a policy to combat it. If you are wrong in your understanding of the Beijing’s actions, however, you will implement policy destined to fail. The devil is in the details.

In addition, presidents cannot assume that any person or advisory system will provide them with the options and information they require, and thus they must be actively involved in the decision-making process, setting the tone for other participants, maintaining the integrity of the advisory system, and reaching out widely for options and information.

President George W. Bush often described himself as an instinctual decision maker, a view shared by other close observers. Many of Bush’s predecessors shared his orientation to making decisions. A drawback to relying on instincts is acting impulsively rather than delving deeply into a range of possible options. Gut reactions also discourage investing time in soliciting and cultivating the views of others and asking probing questions of advisers.

Worldviews

Presidents and their aides bring to office sets of beliefs about politics, policy, human nature, and social causality—in other words, beliefs about how and why the world works as it does. These beliefs provide a frame of reference for evaluating policy options, for filtering information and giving it meaning, and for establishing potential boundaries of action. Beliefs also help busy officials cope with complex decisions to which they can devote limited time, and they predispose people to act in certain directions. Although sets of beliefs are inevitable and help to simplify the world, they can be dysfunctional as well.

There is a psychological bias toward continuity that results from the physiology of human cognitive processes that are reinforced from thinking a certain way and are difficult to reorganize. As a result, there is an unconscious tendency to see what we expect to see, which may distort our analytical handling of evidence and produces what is called a confirmation bias.

The George W. Bush administration operated on several basic premises regarding the aftermath of the war in Iraq: (1) Iraqis would greet Americans as liberators; (2) the Iraqi infrastructure would be in serviceable condition; (3) the army would remain in whole units capable of being used for reconstruction; (4) the police were trustworthy and professional and thus capable of securing the country;, and (5) there would be a smooth transition to creating a democratic nation. Each of these premises was faulty, but the administration made no systematic evaluation of them before the war and was slow to challenge them, even in the wake of widespread violence.

At other times, worldviews may encourage policy makers to assume problems rather than subject their premises to rigorous analysis. Because after 9/11 the Bush White House was highly risk adverse and because it was certain that Saddam Hussein possessed weapons of mass destruction and was a threat to the United States, the administration never organized a systematic internal debate within the administration on the fundamental questions of whether Iraq actually possessed WMD, whether the Iraqi threat was imminent, whether it was necessary to overthrow Saddam and, if so, the likely consequences of such an action. Instead, it focused on the question of how to invade successfully.

It is not surprising, then, that the weakness of the data on Iraq never called into question the quality of basic assumptions. Intelligent, hard-working, and patriotic public officials who wished to protect American saw what they expected to see. We are still paying the price for their faulty analysis.

Policy preferences aside, it matters whom we elect as president. The winner’s understanding of the potential of leadership, skills to recognize and exploit opportunities, policy knowledge and temperament, and worldviews will strongly influence the good the nation will enjoy or the harm it will suffer during his or her tenure.

George C. Edwards III is University Distinguished Professor of Political Science and the Jordan Chair in Presidential Studies at Texas A&M University. His many books include Overreach: Leadership in the Obama Presidency and The Strategic President: Persuasion and Opportunity in Presidential Leadership (both Princeton). His most recent book is Predicting the Presidency: The Potential of Persuasive Leadership.

Untranslatable Tuesdays – Politics

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To mark the publication of Dictionary of Untranslatables: A Philosophical Lexicon, we are delighted to share a series of playful graphics by our design team which illustrate some of the most interesting terms from the Dictionary. For week seven in the “Untranslatable Tuesdays” series we present politics, policy (excerpted from the full entry by Philippe Raynaud):

In French, the noun politique refers to two orders of reality that English designates as two different words, “policy,” and “politics.” In one sense, which is that of policy, we speak in French of la politique to designate “an individual’s, a group’s, or a government’s conception, program or action, or the action itself” (Aron, Democracy and Totalitarianism): it is in this sense that we speak of politiques of health or education or of Richelieu’s or Bismarck’s politiques in foreign affairs. In another sense, which translates as the English word “politics,” la politiques designates everything that concerns public debate, competition for access to power, and thus the “domain in which various politiques [in the sense of “policy”] compete or oppose each other” (ibid.). This slight difference between French and English does not generally post insurmountable problems, because the context usually suffices to indicate which meaning of politique should be understood, but in certain cases it is nonetheless difficult to render in French all the nuances conveyed by the English term, or, on the contrary, to avoid contamination between the two notions that English distinguishes so clearly. On the basis of an examination of the uses of the two words in political literature in English, we will hypothesize that their respective semantic fields are not unrelated to the way in which scholarly theories (and academic institutions) conceive what French call la politique.

 

 

Running Randomized Evaluations

Glennerster_RunningRandomized “The popularity of randomized evaluations among researchers and policymakers is growing and holds great promise for a world where decision making will be based increasingly on rigorous evidence and creative thinking. However, conducting a randomized evaluation can be daunting. There are many steps, and decisions made early on can have unforeseen implications for the life of the project. This book, based on more than a decade of personal experience by a foremost practitioner and a wealth of knowledge gathered over the years by researchers at J-PAL, provides both comfort and guidance to anyone seeking to engage in this process.”–Esther Duflo, codirector of J-PAL and coauthor of Poor Economics

Running Randomized Evaluations: A Practical Guide
Rachel Glennerster & Kudzai Takavarasha

This book provides a comprehensive yet accessible guide to running randomized impact evaluations of social programs. Drawing on the experience of researchers at the Abdul Latif Jameel Poverty Action Lab, which has run hundreds of such evaluations in dozens of countries throughout the world, it offers practical insights on how to use this powerful technique, especially in resource-poor environments.

This step-by-step guide explains why and when randomized evaluations are useful, in what situations they should be used, and how to prioritize different evaluation opportunities. It shows how to design and analyze studies that answer important questions while respecting the constraints of those working on and benefiting from the program being evaluated. The book gives concrete tips on issues such as improving the quality of a study despite tight budget constraints, and demonstrates how the results of randomized impact evaluations can inform policy.

Suggested courses:

  • Program evaluation courses taught in Master in Public Administration/ International Development, Master of Business Administration, and Master of Public Administration programs.
  • Masters of Public Policy courses focusing on economics and impact evaluation.

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