For reasons that continue to elude me, libertarians are obsessed with the Federal Reserve. Their fascination with the monetary authority often spills over into heavy criticism and unproven suggestions that our economy would be more stable, wealthier, and grow faster if we did not have a central bank.
The latest example is a full-page ad in the Wall Street Journal by the Mises Institute. The ad is a long text blaming the Federal Reserve for every economic crisis since World War I, amended with claims about the Fed that range from peculiar to bizarre.
If we peel away the rhetoric and comb the text for substance, their story boils down to two substantive postulates. The first is that the Federal Reserve has never been audited by Congress, with the implication that an audit would somehow structurally change the Fed’s role in the economy. The problem with this postulate is that other government agencies appear to be impervious to audits.
To take one example, the U.S. Department of Defense has failed numerous audits, and it still continues to perform as it has over the last half-century: it barges into conflicts, opens fire, and pulls out without any discernible accomplishment; it merrily dispatches aircraft carriers around the globe at excessive costs to taxpayers; it keeps procuring very expensive, problems-infested weapons systems; and it just loses track of hundreds of billions of dollars.
Why would an audit of the Federal Reserve be any different?
The second postulate in the Mises article says that the Federal Reserve, using its frivolous money printing, is responsible for the recent spike in inflation. I agree insofar as the money-to-inflation link is concerned: as Robert Gmeiner and I proved in a recent article in the American Business Review, a central bank that prints money and buys government debt is setting in motion the fastest, most unstable form of inflation an economy can experience.
Right here, though, the libertarians over at the Mises Institute miss the point—and it is a big one. There is no attempt at discussing why the Federal Reserve printed all the money it did, only a small in-the-passing reference to “the runaway profligacy of the covid years.”
Let me get back to this point toward the end of this article.
Although the Mises article is not supposed to be analytical, and therefore cannot be expected to provide in-depth explanations of its assertions, it nevertheless makes a lot of statements that cannot be true unless the authors have solid, substantive analysis to stand on. Without the slightest attempt to provide as much, even by reference, their attack on the Federal Reserve degenerates into an empty rhetorical exercise.
At some points, the author of the Mises article is downright disingenuous about the Fed:
The Fed wields vast power over interest rates, bank regulation, and the money supply. When it comes to policies that affect the everyday lives of nearly every American—and even countless people outside the United States—it is likely that no government institution is more powerful than America’s central bank, the Federal Reserve.
It remains unclear through the Mises piece exactly how the Federal Reserve is “more powerful” than any other “government institution” in shaping the living conditions of American families. If we assume that they refer to inflation and interest rates, they are correct insofar as the influence is concerned. However, for the purposes of intellectual honesty, they would also have to provide the flip side of that coin. America’s inflationary track record over the past half-century is actually very good: over the 35 years from 1984 through 2019, the average inflation rate in the U.S. economy was 2.4%.
For the past 12 months, we have had inflation in the 3.3-3.6% range.
If the Federal Reserve has the influence that the Mises article suggests it does, then reasonably the monetary authority should also be credited for having kept inflation low for such a protracted period of time.
That does not happen. Instead, Mises goes full force pinning full responsibility for the recent inflation episode on the central bank:
[The] Fed was the primary source of the forty-year highs in inflation consisting of sharp spikes in food, housing, healthcare, and transportation prices. In many cases, rising prices outpaced wage growth, meaning that millions of American households—mostly those with lower incomes and fixed incomes—have experienced negative real income growth in recent years. Meanwhile, Fed policy has also driven inflation in real estate and equity prices, which has padded the portfolios of wealthy households, banks, and governments.
The claim here is that the Federal Reserve bankrolled the massive expansion of U.S. government debt during the COVID pandemic. This is both statistically and analytically true; we don’t have to go back to my article with Robert Gmeiner to see that this causes inflation. However, we do explain comprehensively why and how the inflation mechanism is so formidable when central banks print money and buy government debt.
Alternatively, we can also just look at the numbers from the COVID pandemic:
- From 2019 to 2021, U.S. government debt increased by $5,716 billion;
- During the same period, the Federal Reserve increased M2 money supply by $6,237 billion.
The Fed increased its holdings of Treasury securities by $3.5 trillion from the end of 2019 through 2021.
In other words, it looks like there is a great deal of substance to the suggestion in the Mises article that the Federal Reserve caused our recent run-in with inflation.
There is just one problem. The extra spending during the COVID pandemic was a direct result of widespread, government-imposed economic shutdowns. To make a long story short, many people got paid by government for being forced to stay home from their jobs—even if their jobs were in the private sector.
This type of extra spending was not the only fiscal excess that occurred during the COVID pandemic, but it was representative of the kind of extravaganza that Congress allowed itself to keep people happy during hard times. However, the underlying reason for all that spending was the fiscal premise that Congress had established decades earlier, namely that the federal government has a responsibility to provide for the livelihood of the American people.
That premise was established in the early decades of the last century, when Congress built the American welfare state. Entitlement benefits of various kinds were created, from Social Security and Medicare to Medicaid, the Earned Income Tax Credit, food stamps, and even an assortment of public-school-related benefits.
Thanks to this welfare state, as we know it, two-thirds of the federal government’s current outlays are used for teconomic redistribution. In short,
- The government takes in money through a highly redistributive tax system, placing the bulk of the burden on the shoulders of the rich, and
- Doles out that money through an equally redistributive spending system, with a profile strongly slanted to the benefits of lower-income households.
This system, which we know as the welfare state, is socialist in nature and should therefore be a big, red ideological flag for the Mises Institute. In other words, if they really were out to stop the Federal Reserve from printing lots of money to finance government debt and deficits, they should spend their resources opposing the welfare state.
Without economic redistribution, there is no structural deficit in the federal budget. Without a structural deficit, there is no need for the Fed to buy government debt.
Therefore, my only question is: why doesn’t the Mises Institute spend its resources on fighting the welfare state instead of the Federal Reserve?
