PROJECT SYNDICATE DRAFT: Lael Brainard for Fed Chair

Why is this not obvious?

President Bill Clinton was impressed by then-Federal Reserve Chair and Republican Alan Greenspan's willingness to offset Clinton's deficit-reducing fiscal contraction with monetary expansion in order to keep recovery and growth from stalling in the 1990s. Greenspan did so over the partisan objections of Republicans denouncing him for making monetary policy too loose. And so Democratic Bill Clinton reappointed Republican Alan Greenspan to Chair the Federal Reserve. But Greenspan’s nurturing of the very beneficial 1990s dot-com boom was about the last time he was nonpartisan and brave and wise. In the 2000s Greenspan chose to be a Republican partisan first and to keep private his beliefs that the Bush-Frist-Hastert tax cuts were bad policy. And he strongly rejected the pleas of Fed Governor Ned Gramlich that housing, and derivatives, and housing derivatives needed much closer scrutiny and regulation. “Ned, I just cannot get in the way and tell lenders who want to lend that they cannot lend to home buyers who want to borrow”, he might have said. But that is what his predecessor William Chesney Martin famously said the key job of the Fed Chair is: to take away the punchbowl before the party gets too loud, even though the party-goers are protesting.

President Barack Obama was impressed by then-Federal Reserve Chair and Republican Ben Bernanke’s willingness to work on a bipartisan basis to press the perceived limits of monetary policy in order to try to curb the Great Recession and strengthen recovery. And so Democrat Barack Obama reappointed Republican Ben Bernanke to Chair the Federal Reserve. Bernanke did hold the line and continue his quantitative-easing policies in spite of outraged cries from Republican economists and non-economists who had convinced themselves that an America that had elected Barack Obama needed to be punished by higher unemployment produced by rapid normalization of monetary policy rather than see monetary expansion produce a degree of prosperity that they dismissed as only a sham. The problem, however, was that the degree of prosperity was small. The U.S employment-to-population ratio had peaked at 63.4% in December 2006. It was 58.3% in December 2009. Three years later, in December 2012, it was only 58.7%. When Bernanke stepped down in January 2014 it was no higher. Bernanke was bitterly disappointed at the anemic recovery. In the late 1990s Bernanke was vociferous that the Bank of Japan had the power to and should do whatever it takes to restore the economy to full employment. But things looked different to him when he became a central banker. Not until after his retirement did the employment-to-population ratio begin rising at the rate of about 1%-point per year that would return the economy to within shouting distance of full employment in the third year of the term of President Trump.

Now it appears that Democratic President Joe Biden is about to reappoint Republican Fed Chair Jay Powell. For the life of me I cannot understand why. Jay Powell is profoundly out of sympathy with the Democratic near-consensus perspective on financial regulation. Jay Powell does not have strong technocratic views on monetary policy that are in accord with the current Democratic near-consensus perspective on macroeconomic management. Jay Powell has spent the past four years following interest-rate and quantitative-easing policies that are in accord with the current Democratic near-consensus. But that is because of two factors: First, and most important, the Republican Party has been split down the middle and thus neutralized by the bitter conflict between the hard-money knee-jerk instincts of Republican worthies and the soft-money knee-jerk instincts of real-estate developer Donald Trump, for whom money can never be too cheap. Second, Governor Lael Brainard has been extremely persuasive in arguing, I think rightly, that the current neutral rate of interest is still below zero, and that the supply shock-driven inflation caused by the economic impact of the SARS-CoV-2 pandemic should be accommodated.

The first of these is going away. Without Trump in office, and without a fear that tight money will erode vote margins in the short run, Republican worthies are about to unite overwhelmingly behind the talking point that monetary policy needs to be substantially tightened immediately. Jay Powell is a Republican worthy. He will listen. If you think that the standard Republican hard-money perspective is, in fact, good policy right now, that is fine. But if not, not.

So what, again, is the argument against Lael Brainard—on technocratic substantive-knowledge chops, on charisma, on persuasiveness, on monetary policy, on regulatory policy, on not binding the mouths of the kine that tread the corn and properly valuing the contribution of a woman who stayed the course at her post during the Trump administration—for Fed Chair?

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