Has the Fed bought the Economics profession?
There’s an intriguing and well written, though overly long, article over at HuffPo called “How the Federal Reserve Bought the Economics Profession“.
The basic idea is that so many economists work for the Fed, have worked for the Fed, or want to work for the Fed that their desire to please their employer has stifled debate over the Fed’s role throughout the profession.
Certainly such a thing is possible; Hayek, in his 1944 Road to Serfdom, noted that he was advocating for small government against his own self-interest since more active governments engaging in central planning hire lots of economists.
But is the problem that the Fed serves no purpose except to employ economists? Far from it. The importance of monetary policy has been noted by most economists for a very long time; as far as I know only the Austrians say it is necessarily a bad thing. Rational expectations folks say it does neither harm nor good (it really does just provide jobs to economists), but this almost undermines the monetary-economic complex conspiracy theory, since Ratex emerged in the 70’s just as this article said the Fed was becoming more powerful, and rational expectations continued to grow in popularity and power at the same time the Fed did. Interestingly, this crisis has not been good to the credibility of either the Fed or the Ratex people despite their opposition to each other.
So monetary policy is necessary, but the Fed still stifles criticism of its own current brand of monetary policy? This seems unlikely to me, because it would mean the Fed is working against its own long-term interest. The Fed gains power and credibility as its monetary policy gets better, and policy will get better only through criticism and refinement. Fed employees should be pretty forward-looking since their appointments last several years.
I wonder if advocates of unconventional monetary policy like Scott Sumner feel “stifled”. I suspect it is only people like Galbraith who question the Fed’s motives who run in to trouble, rather than people who simply think they could run things better.
As far as Galbraith’s accusation about the Fed’s political bias: his numbers actually did seem to bear this out when I looked at this last. However, of all major Presidential candidates it was George H.W. Bush who felt most strongly that the Fed cost him the election; and this in 1992 when the Fed was run by longtime Republican and former Objectivist Alan Greenspan.
The most convincing criticism in the article is the quote from the Father of Monetarism himself, Milton Friedman, criticizing the Fed’s large influence on the profession. I guess we could say that the Fed has some “market power” in the intellectual marketplace, making the market for ideas less than perfectly competitive.
On the whole though, I don’t worry that the Fed has bought the profession. But then, that’s probably just because I’m holding out for a job there. Or because of the check Bernanke is sending me to write this post.