Unrestrained majoritarianism is not the way that the U.S. is meant to work.

The idea that the Fed should, so far as ever possible, be “apolitical” is obviously at odds with a crudely majoritarian notion of democracy. However, unrestrained majoritarianism is not the way that the U.S. is, quite rightly, meant to work, a point seemingly missed by those within the Trump administration, their sympathizers and, far from paradoxically, the left, who call for a more “democratically accountable” Fed.

As economist John Cochrane observes:

We don’t live in a democracy. We live in a constitutional republic, with strict limits on government power. We don’t vote 51-49 whether the city should seize my house and turn it into a homeless shelter. I have (some!) property rights. We don’t vote every 6 weeks on interest rates up or down. If you want “democratic accountability,” then why not? The Fed is a carefully constructed republican (small r) institution, that does a lot of collecting information, bringing diverse communities together, representing many people’s wishes. Votes are not the only way to aggregate preferences, produce consensus and legitimacy.

Cochrane has written a careful and not always unsympathetic critique of the idea of a more “democratically accountable” Fed, which is well worth taking the time to read in full. I hope to discuss it in more detail at a later date, but the key paragraphs underpinning his argument are these.

Yes, the Fed is supposed to be “independent,” but:

Independence in a democracy is a limited grant. The Fed cannot stoke inflation by giving people money, nor stop inflation by confiscating money. Those would work, but taxing and spending must remain the providence of more political (not necessarily a bad word) or accountable branches of government. The Fed cannot independently decide that it wishes to stop the climate crisis, end inequality, reverse trade deficits, or bring back manufacturing.

Independence must compromise with accountability. Independence slows down the popular and political will but does not stop it. Independence comes with a limited mandate (price level, employment, and financial crises, nothing else), limited tools (originally, short-term interest rates and small treasury purchases), and periodic review including appointments. An agency can be more independent the more its activities do not resemble transfers, as that is the essence of politics. Stop clutching pearls, it will be a compromise and the question is how to structure this compromise…

My instincts lie in the opposite direction: Restore Fed independence by restoring limits on its activities. If it’s interfering politically in fiscal policy, credit allocation, bank regulation, and other areas, then tighten the limits on mandate and tools rather than accept the current much broader set of interventions but add more political direction — sorry, “democratic accountability.” I prefer the “democratic accountability” to lie in better defining the rules of the game, and less in telling the Fed which piece to move.