Barack Obama has not accomplished nearly as much as his most fervent supporters — or, indeed, the president himself — had hoped he would during the 2008 campaign. This has led, naturally, to a litany of back-biting complaints about the corruption or incompetence of the president and his team, a storied list of alleged tactical failings or ideological betrayals. The truth is, however, that he has accomplished an enormous amount given the objective structural circumstances of American politics.
But as the country waits to hear the latest announcement from the Fed about how rapidly it will end its Quantitative Easing programs, we are witnessing the biggest mistake of Obama's presidency: the systematic neglect of the Federal Reserve and of his ability to influence its course of action.
This is a failure that sounds boring but has likely doomed millions of people to needlessly long spells of unemployment; permanently reduced the structural capacity of the American economy; and, through poor macroeconomic performance, reduced his political ability to drive change in environmental policy, bank regulation, and other areas.
The team player
The Federal Reserve's September 17 statement isn't likely to offer any surprises to anyone who'd been watching Fed statements from earlier in the year. The Fed is set to continue its course of unwisely tightening monetary policy even as unemployment remains high and inflation remains low. The only question being debated at today's Fed meeting is how quickly to tighten. Earlier in the year, proponents of more monetary stimulus had reason to hope that we might get something different from new Federal Reserve Chair Janet Yellen. During her previous service on the Fed, she had amassed a reputation as one of the governors most concerned with weakness in the labor market and most eager to push for more aggressive stimulus. Her elevation to the top job should have increased her clout and increased the odds of more easing.
Instead, as Jon Hilsenrath — far and away the best-sourced reporter on the Fed beat — explained earlier this week, with the new job came a shift in Yellen's role. The Chair does not actually have much in the way of formal powers that elevate her above the other members of the Open Market Commission. So as Chair, Yellen "has taken a much different approach, becoming a restrained consensus seeker modeled after her predecessor" rather than her previous role as an "unabashed advocate of easy money who pressed colleagues to embrace her view."
Given the structure of the Federal Reserve, this is perhaps an inevitable choice on her part. But what's not inevitable is the set of people between whom the consensus needs to be forged. The FOMC that makes these decisions is mostly composed of presidential appointees — the seven members of the Federal Reserve Board of Governors. But Obama has failed to make a point of tapping proponents of monetary stimulus for these positions. Even worse, he's left two of the slots entirely vacant — not vacant because of GOP obstruction, but vacant because he hasn't nominated anyone to fill them.
Obama's monetary theory
Obama's neglect of Federal Reserve appointments is, in some ways, mysterious. Nobody denies that the Fed is an extremely important institution — albeit one that operates independently from the elected branches of government. When it comes to other important independent institutions such as the federal judiciary, it's broadly acknowledged that the presidential appointment powers are among his most important powers of office. Precisely because judges operated independently of presidential oversight, picking the right ones is vital.
The Fed is similar. Except that because the Fed has an important influence on short-term economic growth and short-term economic growth has an important influence on the president's popularity, it's even more important.
Except Obama doesn't seem to see it that way. Earlier in his administration he reportedly told Council of Economic Advisors Chair Christina Romer that "monetary policy has shot its wad." This remark was dissected for alleged sexism, but is more worth paying attention to as a reflection of monetary policy views.
The viewpoint that there is nothing the Federal Reserve can do to boost the economy when short-term interest rates are already at zero, leaving deficit spending as the only effective stimulus option, is not believed by most experts. This particular combination of views is most closely associated with a somewhat marginal group of left-wing thinkers who describe themselves as modern monetary theorists. Except it's also something that key Obama advisor Larry Summers believes, and the fact that Obama tried to install Summers as Fed Chair indicates that Obama believes it too.
This belief in monetary impotence likely explains why Obama is so lackadaisical about filling vacancies. He believes the Fed's role in fighting a potential crisis is crucial, but the current team helmed by Yellen and Deputy Chair Stanley Fisher is up to that job. Bolstering the left flank on the FOMC so that Yellen's consensus-building efforts would land in a more stimulative spot isn't on the agenda.
A long record of neglect
The current vacancies are not a new phenomenon. By April of 2010 when Obama had been in office for well over a year there were three vacancies on the Fed. One of his earlier nominees was a Republican and another — Jeremy Stein — is a Democrat who holds to an eccentric view that tight money is sometimes appropriate even when unemployment is high. That's the same opinion that led to economic stagnation in Sweden, and electoral defeat for its incumbent government.
How much good could have been done if Obama had listened to Romer, Scott Sumner, Joseph Gagnon, or others and placed a higher priority on appointing unemployment-fighters to the Fed? Nobody can say for sure. But the experience of the United Kingdom is illustrative. The UK government has enacted much sharper levels of fiscal austerity than anything done in the US, perhaps partly as a result the UK's overall economic performance has been dismal. And yet largely thanks to more stimulative monetary policy, the UK has done as well or better than the United States in terms of job creation. If we had paired that kind of monetary policy with our superior fiscal policy and better luck at fossil fuel extraction, we could potentially have enjoyed significantly faster employment growth.
That would have meant faster GDP growth, fewer workers exiting the labor force, and therefore higher estimates of the country's long-term economic potential. A speedier turnaround would also have meant a more popular administration, whose party would have done better in the 2010 and 2012 midterms and thus had more latitude to pursue its legislative preferences. FDR's long-term impact on American policy comes from the structural reforms of the New Deal. But as Romer showed in her famous research on the Depression, "nearly all the observed recovery of the US economy prior to 1942 was due to monetary expansion." That recovery — driven by Roosevelt's pursuit of aggressive monetary policy in the form of ditching the gold standard — is what gave him the political clout to pursue those structural reforms.
Had Obama been as attuned to monetary matters as FDR, he could have secured a better result for the country and a firmer legacy for himself.