Here's one more reason to take Bernie Sanders's candidacy seriously: He has put forward statements and arguments on what is by far the most powerful lever a president has on the American economy — the chronically neglected subject of monetary policy.
Sanders's Fed agenda cuts against the narrative of a campaign agenda at odds with wonks' preoccupations and political reality. It could use a little more polish and consultation with a wider range of experts, but it's certainly more detailed and substantive than anything Hillary Clinton (or, for that matter, Barack Obama) has said on the subject. It's also realistic — based largely on things that can be achieved through executive authority.
These ideas got a relatively warm reception from a somewhat surprising source: former Bill Clinton Treasury Secretary and former Obama National Economic Council Chair Larry Summers. This should tell you a lot, given that Summers and Sanders stand at essentially opposite poles of intraparty Democratic debates about economic policy.
Sanders's core point: The Fed could do more to help working people
Politicians rarely talk about the Federal Reserve even though it's the main agency that regulates the pace of job creation. It's true that the Fed operates independently of elected officials' views, but so does the Supreme Court — and elected officials are perfectly aware that it makes no sense to talk about abortion rights without mentioning the Supreme Court.
Sanders's core insight, which he laid out in a New York Times op-ed that ran on December 23, is that if you want to talk about jobs and the economy, you need to talk about the Fed. And if you want to understand sluggish wage growth over the past 15 years, it's important to note the Fed's structural biases in favor of Wall Street preoccupations with financial stability and inflation control.
Though it has few details one could quibble with and could use some fleshing out (the idea that the Fed should use the proceeds from hypothetical negative interest rates on excess reserves to make direct loans to small businesses, in particular, seems both unnecessary and very difficult to make workable), the broad trajectory of Sanders's thinking is pretty clear. In the name of establishing a central bank that is free from day-to-day political independence, Sanders is saying, the United States has in fact ended up creating a central bank that is excessively influenced by the views of the financial services industry and is largely indifferent to the interests of average Americans.
This argument is one that we economics nerds have been having among ourselves, with almost no politicians calling for less aversion to inflation. Sanders, by doing so, is both doing a public service in elevating the issue and outlining what would, if he became president, be a powerful mechanism for boosting job creation and wage growth.
Sanders's argument with Fed Chair Janet Yellen
The main way the Fed regulates the pace of job creation is by creating or destroying money in order to lower or raise interest rates. Creating money accelerates the pace of job creation, leading to lower unemployment rates and raising the specter of faster wage growth.
Creating too much money raises the specter of inflation — if people rush out to buy more things than the economy can make, prices will rise rather than output rising. Destroying money does the reverse, slowing the pace of growth or even throwing the economy into recession to temper inflation.
At its December meeting, the Fed's monetary policy committee made a somewhat strange call. It decided to raise interest rates to slow the economy, even though inflation was low and had been low for a long time.
We won't fully know what committee members were thinking until transcripts are released five years hence, but according to the official minutes it was a judgment call about the balance of risks:
A number of members commented that it was appropriate to begin policy normalization in response to the substantial progress in the labor market toward achieving the Committee's objective of maximum employment and their reasonable confidence that inflation would move to 2 percent over the medium term. Members agreed that the postmeeting statement should report that the Committee's decision reflected both the economic outlook and the time it takes for policy actions to affect future economic outcomes. If the Committee waited to begin removing accommodation until it was closer to achieving its dual-mandate objectives, it might need to tighten policy abruptly, which could risk disrupting economic activity.
They are saying that because the precise scale and timing of the impact of slowing growth is difficult to predict, it was smart to start working on it preemptively rather than wait until an actual inflation problem manifests itself. Better to keep job growth and wage growth slow than to run the risk of overheating.
The recent decision by the Fed to raise interest rates is the latest example of the rigged economic system. Big bankers and their supporters in Congress have been telling us for years that runaway inflation is just around the corner. They have been dead wrong each time. Raising interest rates now is a disaster for small business owners who need loans to hire more workers and Americans who need more jobs and higher wages. As a rule, the Fed should not raise interest rates until unemployment is lower than 4 percent. Raising rates must be done only as a last resort — not to fight phantom inflation.
Reasonable people can disagree on where to strike the right balance, but Sanders's view has a lot of support from policy wonks. That's everyone ranging from former Minneapolis Fed President Narayana Kocherlakota to Paul Krugman to Summers to Vox's own Tim Lee, and even the conservative American Enterprise Institute's Jim Pethokoukis.
Sanders could really make this happen
Importantly, shifting the Fed's sense of the appropriate balance is something a President Sanders could actually make happen. Most obviously, there are two vacant seats on the Federal Reserve board that Sanders could fill with sympathetic thinkers.
But beyond that, by simply articulating the views outlined in this op-ed, a Sanders administration could change the calculation in a meaningful way. Staffers at both the central Fed office in DC and several of the regional banks have consistently told me over the years that the central bank has felt implicitly restrained in how much it can stimulate economic growth by fear of actual and possible political criticism — criticism that comes almost exclusively from inflation hawks who accuse the Fed of doing too much.
A Sanders administration would balance the scales and give those inside the institution who favor a less inflation-phobic approach more room to operate while also reinforcing their ranks with new nominees.
A debate worth having
Unfortunately, few who are interested in American politics care about monetary policy — even though the business press regards monetary policy news as essentially the most important economic policy story in the world.
Consequently, it's not surprising that Sanders hasn't talked much about his monetary policy ideas, and equally unsurprising that Clinton has neither challenged his ideas nor put forward ideas of her own.
But even though it's boring, making appointments to the Federal Reserve Board is one of the most consequential powers a president has — especially in a time of gridlock. Failure to pay adequate attention to this issue is the number one domestic policy error of the Obama administration, and it would be an enormous shame for the next president to repeat it. Sanders is giving strong indication that he wouldn't, while Clinton's silence raises the alarming possibility that she would.