Predicting Policymakers' Views

Our finding that ideas have been the key determinant of policy success has an obvious implication: in choosing the Federal Reserve chair, it is crucial to find someone who will be guided by a sensible economic framework. But how does one predict who will have sensible beliefs? (…) Of course, a sensible framework is not all that matters. A Federal Reserve chair with sound beliefs might be unable to impose those beliefs on an FOMC with radically different views. However, the experience of the Federal Reserve since 1936 has been that the chairman's beliefs are almost always central to policymaking. (…) even Miller, who was not particularly skilled or savvy as a leader, was able to impose his views on the FOMC almost immediately. Furthermore, the success and prominence of Volcker and Greenspan have surely enhanced the deference that will be given future chairs. Therefore, it is extremely unlikely that a future chair will be unable to fashion policy according to his or her economic framework. (…)

Predicting Beliefs Using Biographical Information

Formal training in economics has an obvious problem as a predictor of sound understanding of the economy. Burns, who was a distinguished economics professor and president of the National Bureau of Economic Research, was unquestionably the best-trained chairman. Yet his rapidly fluctuating and often unrealistic views had severely adverse consequences for policy. Nonetheless, the record suggests that training in economics is desirable. The two chairmen with essentially no training in economics, Eccles and Miller, had deeply flawed understandings of the economy that led to highly misguided policies. Greenspan and Volcker, two chairmen with sensible economic beliefs, were both economics majors who did graduate-level work in the field. (…)

The three chairmen with the most sensible views, Martin, Volcker, and Greenspan, were all at some time associated with the New York financial services industry: Martin was a stockbroker who became president of the New York Stock Exchange at age 29; Volcker alternated between positions at the Federal Reserve Bank of New York and Chase Manhattan; and Greenspan founded a successful New York consulting firm that had many of the nation's leading banks as clients. In contrast, Eccles was a relatively small-time banker from Utah, and Miller was CEO of a large corporation based in Rhode Island. Both were quite successful in business but somewhat provincial. Burns, the third chairman with flawed beliefs, also had no significant Wall Street connection.

The three chairmen with the most realistic frameworks also had extensive, relatively non-partisan public service. Martin left Wall Street at age 36 when he was drafted into the army, and served as head of the Export-Import Bank and assistant secretary of the Treasury before becoming Federal Reserve chairman. Volcker spent the majority of his time in public service; his positions included under-secretary of the Treasury and president of the Federal Reserve Bank of New York. Extensive public service in areas related to monetary policy may foster pragmatic, sensible views of how the economy operates. Consistent with this, Greenspan, the third successful chairman, was chairman of the Council of Economic Advisers and served on (and typically chaired) a number of blue-ribbon commissions, such as those setting up the volunteer army and reforming the Social Security system. Two of the Federal Reserve chairmen with misguided models are notable for their lack of public experience of all types. (…) Again, Burns is the exception: he was chairman of the Council of Economic Advisers in the 1950s and remained active in economic policy debates in the 1960s, and yet held flawed and volatile views. In contrast to Martin, Volcker, and Greenspan, however, he lacked non-partisan public experience. (…) Highly partisan chairs may tend to have unrealistic views because they are chosen for their partisanship rather than for their expertise, or because their partisanship clouds their judgment. Two of the chairmen with the soundest views, Martin and Volcker, had little political involvement and believed that the Federal Reserve chair should not be involved in issues unrelated to monetary policy. At the other extreme, the chairmen with misguided models were quite partisan (…) Greenspan, however, is an exception to this pattern: he has strong (and sometimes extreme) political views and has taken partisan stands on fiscal policy, and yet has a sound monetary policy framework. (…)

It is therefore useful to consider other ways of predicting beliefs. The obvious alternative is to analyze the public statements of each nominee prior to becoming chairman (…) Eccles's prior record shows that he was an intuitive Keynesian. Unlike many policymakers in the 1930s, he did not view the Depression as desirable or immutable. He was a constant advocate of deficit spending and other measures to stimulate aggregate demand (…) his view was that monetary expansion that did not get money directly to consumers and firms would have no effect. In 1933, he stated: “[Y]ou can print money, you can remonetize silver, you can reduce the gold content of the dollar and it is not going to raise your price level unless you start the purchasing power at the source with the consumer” (…)The prevailing beliefs at the FOMC during Miller's tenure included a very optimistic estimate of the natural rate and extreme pessimism about the effectiveness of slack in reducing inflation. In his prior writings and speeches and at his confirmation hearing, Miller expressed precisely these views. To put it bluntly, President Carter and Congress had to have known what they were getting when they chose Miller as Federal Reserve chairman. (…) In his prior writings and speeches, Volcker expressed many of the views that became the hallmark of his tenure. He consistently extolled the benefits of low inflation and the critical importance of monetary policy in achieving it. (...) His policy prescription was simple: “[W]e will need to act to bring monetary growth targets gradually down to non-inflationary levels”. He reiterated these views at his confirmation hearing (...) He clearly understood that substantial unemployment would be required to reduce inflation. Nevertheless, he argued that the benefits of low inflation were large enough that it was worth bearing those costs. (…)

Each of the past Federal Reserve chairmen expressed quite clearly the views that dominated policymaking during his tenure at the confirmation hearing or before. This finding suggests a crucial strategy for evaluating potential candidates for Federal Reserve chair: find out their beliefs about how the economy works and what monetary policy can contribute. Read their previous writings. Ask them about their model of the economy and listen very carefully to the answers. (…) In this regard, the confirmation process of G. William Miller is an important cautionary tale. The Senate Banking Committee is often mocked for having spent inordinate amounts of time investigating possible misdeeds of the Bell Helicopter subsidiary of Miller's corporation while letting Miller's unconventional macroeconomic framework go unchallenged. But in truth, the committee asked Miller enough questions about his beliefs and prior writings to get a clear picture of his views. And a number of committee members expressed great skepticism about Miller's answers. What is shocking is that the committee nevertheless voted overwhelmingly to confirm him. It is as if, when the senators did not find enough evidence to reject Miller on the basis of corporate malfeasance, they felt that fundamentally flawed beliefs about how the economy worked were not an adequate reason for blocking his confirmation.