This nation, sliding swiftly down a steep slope of fiscal irresponsibility, barely notices a blur of alarming milestones. Last week, we sped past this one: A $1.1 trillion deficit in the first six months of fiscal year 2024 that began Oct. 1 resulted in almost as many dollars spent on debt service ($429 billion) as on defense ($433 billion).
This, at the most threatening geopolitical moment since 1945, makes one hope that JPMorgan Chase CEO Jamie Dimon was radically wrong in saying recently that interest rates could reach 8 percent or more in coming years. If they do, deficits will explode even before the Social Security and Medicare trust funds are exhausted, within 10 years.
The Federal Reserve was instrumental in igniting inflation with too-cheap money for too long, and then was serene about inflation’s supposedly “transitory” nature. In 2012, the Fed announced its hubristic plan to achieve itsaspiration of exactly 2 percent inflation. Even if evidence indicated the Fed capable of such precision (evidence does not), Joseph C. Sternberg’s question in the Wall Street Journal is apposite: “Who elected these folks to aim for a 50% loss in purchasing power of a dollar every 35 years ?”
In a recent report, the Manhattan Institute’s Dan Katz and Stephen Miran argue that “the Fed’s current governance has facilitated groupthink that has led to significant monetary-policy errors while allowing the Fed the flexibility to unwisely expand its remit into inherently political areas such as credit rationing and banking regulation.” Here is groupthink: “Despite the biggest monetary errors in four decades,” Katz and Miran write, none of the nine recent appointees to the Board of Governors were on record as having made accurate predictions about inflation’s path. Mission creep: The Fed has moved beyond its traditional technocratic role and “pursued a much more expansive monetary and regulatory agenda that is more consistent with an explicitly political institution.”
This has included allocating credit, thereby picking private-sector winners and losers; urging Congress to favor the Democrats’ stimulus proposal (10 times the size of the Republicans’ proposal) a month before the 2020 presidential election; allowing racial induction in its operations; and injecting environmental considerations into financial regulations. What the Fed calls “climate-related financial risks” are fictitious. This column has previously noted that the Hoover Institution’s John Cochrane is correct: Measurable climate risk to the financial system’s “resilience” in the time frame that regulation can predict and control — five years or so — simply does not exist.
In July 2019, Fed Chair Jerome H. Powell said: “We don’t have authority … to lend to state and local governments.” Nine months later the Fed did that. Randal K. Quarles, leaving as the Fed’s vice chair for supervision in 2020, said, “Those whose plans are grand and whose patience with democratic accountability low” will ask “why the Fed can’t fund repairs of the country’s aging infrastructure, or finance the building of a border wall, or purchase trillions of dollars of green energy bonds.” Perhaps it could. Who would stop it? Congress cannot even budget but is a geyser of opinions about everything. As government’s institutions fail at their primary missions (the Fed’s is to preserve the currency as a store of value), the institutions pursue grandeur through mission creep. This is perhaps partly for the pleasure of being where political fashion locates excitement (today, “equity” and climate change).
Katz and Miran recommend shortening the terms of members of the Fed’s Board of Governors, and making them removable by the president. The authors would balance this increased democratic control by nationalizing the reserve banks, which are privately owned by local banking consortia. Katz and Miran say, somewhat puzzlingly, that making the reserve banks government institutions subject to political accountability would somehow make them a counterweight to the Board of Governors whose members would be removable by the president.
It is counterintuitive to advocate more direct political control of the Fed amid accumulating evidence that politics is the problem. That the biggest threat to American democracy (BEG ITAL) is (END ITAL) American democracy. The fiscal incontinence propelling the nation toward an entirely predictable crisis reflects the majority’s preference: Let’s make unconsenting (because unborn) future taxpayers — debt is taxation, including the tax of inflation, deferred — pay for a significant portion of our consumption of government services. Institutional tinkering with the Fed is no substitute for mature politics.
In recreational toboggan rides, the exhilaration of synthetic danger subsides as the sleds glide to a stop. Today’s fiscal plunge will not end so quietly.
Reach George Will at [email protected].
