Can the Fed save us?

For those who shop at grocery stores, gas stations, or anywhere else, it’s no surprise that in 2022, every dollar bought significantly less than a year ago. Just how much less can be surprised. The May Consumer Price Index (CPI) growth was the highest since the early 1980s, rising 8.6 percent. In terms of this year, one dollar will only buy what ninety-nine cents bought in 2021. “Dollar tree?” Remember? It is now the dollar and 25 trillion, ”he said. In addition, market estimates, including those of the Fed itself, suggest that inflation will remain above the normal 2-percent target. And several experts point to a major risk of a recession in 2023. This is the reality of rising prices at the general level, which economists call inflation.

Of course, the Fed is most closely associated with tackling the causes and effects of inflation. This association is highly influenced by the Fed itself. Whenever there is an economic crisis, it is said that the Fed must do something. Elected officials and the public expect the Fed to provide non-partisan economic analysis to help manage the economy and avoid large-scale economic disruptions. Despite these expectations, and despite real efficiency in the Fed, we have high levels of inflation, and most experts expect them to continue.

Which points to the Fed’s biggest problem. Contrary to the assumption that the Fed is made up of non-political experts on the mechanics of economics, the Fed is expected to manage the economy. In A political system. Nobel laureate economist James Buchanan has expressed deep doubts about the success of such a system. Buchanan, who is best remembered for helping establish public choice economics, insisted that we should often do so without examining the political system, without the romance associated with public service. He and the public choice scholars who build on his work rightly claim that simply because someone is working for the public, they are not suddenly more moral or less than their interest.

In their book Democracy in deficitBuchanan and Wagner observe that “the election of more honest or enlightened politicians will not solve our problems.” 

Their observation is important in light of the Fed’s call for an impartial group of experts to respond to any economic crisis. They are expected to maintain inflation and unemployment at the same time to ensure economic prosperity. Many expect them to do just that, but the truth is less clear. Instead they are limited by politically acceptable actions.

Despite their technical expertise, those who work at the Fed are not free from their own interests, including political motivation and the desire to maintain influence in the economic system. Although they pull the levers of the day-to-day work of the state apparatus, have unlimited power, and most importantly, are not directly responsible for the success or failure of their efforts to manage the economy, they simply do not act as objective specialists.

The Fed’s order is based on two assumptions. First of all, those in the Fed will know what is the ‘right decision’ to achieve its mandates, at best, if you have read Hayek, a weak proposal. And second, they are capable and willing to make those decisions outside of the larger political system and without being influenced by their own interests.

Even if we set aside Hayek’s strong objection to the first assumption, the second has been thoroughly rejected by the public choice. The notion that those who work at the Fed are merely public-spirited experts who are protected against political pressure and their own desire to remain relevant is ridiculous.

Instead, those who work within the Fed respond to political incentives and their own interests. Indeed, like those who work in government, their policy decisions, according to Buchanan and Wagner, “respond to the demands of both the people and the bureaucracy.”

Those who claim that the Fed will solve economic problems only through the application of neutral skills should be aware of the reality of public choice that all those who work in government should face. Incentives for individuals working in the Fed can be identified. To be sure, they have the incentive to maintain economic stability by controlling inflation and unemployment through monetary policy. But their motivation goes beyond what is clearly expressed by their mandate. They face incentives to maintain their short-term position often when macroeconomic stability is later on the scale of their priorities when the situation changes. Moreover, despite their non-partisan nature, they remain part of the political system and are keen to maintain influence and power.

The reality of public choice should force everyone to think twice when it is stressed that the Fed or any agency should do something to fix the economy and they will be able to make the right choice. Like all government agencies, there is more going on than just recklessly applying the right answer for the right reasons.

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