The debate on the monetary policy response to curb spiraling inflation has focused primarily on the role of the Federal Reserve. The role of the president in the factors that contributed to the recent bout of inflation has been largely overlooked, according to Wharton professor of legal studies and business ethics Christina Parajon Skinner.
In a paper titled “The Monetary Executive,” Skinner writes that the president has “far more influence over money in the economy—and levers for ‘fiscal dominance’—than the Constitution arguably allows, casting a long shadow over the Federal Reserve’s ability to properly rein in inflation.” According to her, those powers could potentially be used to further political agendas and to unfairly disadvantage sections of the economy. Among the remedies she suggests are congressional actions to scale down those presidential powers or limit those granted in emergency, a more assertive Fed, and a more vigilant public.
“Economists, and in particular, monetarists tend to believe that inflation is fundamentally a problem that results from a rapid increase in the money supply, suggesting that the cause lies with the Fed and failing to curb the rate of growth of the money supply through its traditional monetary policy tools,” Skinner says. “That view implicitly presumes that the Fed is making decisions in a world of perfect central bank independence.” In other words, that view presumes that the Fed’s decisions about money supply and how to use its interest-rate and balance-sheet tools are not guided by “a president’s desire to have a hotter economy, which is to say easier money or more government spending,” she explained.
With increasing presidential influence over monetary policy, inflation is no longer just a monetary phenomenon, Skinner says. “Fiscal dominance” becomes a risk if and as the Fed’s policies cater to “the fiscal prerogatives of the president,” she notes. “The most straightforward and drastic example of fiscal dominance — and the reason why we want to think about the presidency here—is debt monetization.”
Although the Fed is vested with the responsibility for maintaining stable prices, “the line between what is ‘monetary’ and what is ‘fiscal’ has blurred increasingly since 2008, so too have the roles of Congress and the president, versus the Fed, in contributing to inflation,” Skinner writes. That situation has given cause for alarm. She notes that “experts are increasingly worried about the return of ‘fiscal dominance,’ whereby the fiscal prerogatives of government have the upper hand in a central bank’s decisions.”
Skinner is not suggesting that we are already seeing the worst of that phenomenon. “I’m not claiming that the Fed has succumbed to fiscal dominance, but I’m saying that 2020 [and the spending programs in the wake of COVID] should be taken as a warning shot across the bow,” she says. “We’ve seen the conditions for fiscal dominance to reemerge—an administration that believes in deficit spending and a crisis that provides overt justification for dramatic increases in the money supply under the heading of economic relief. While the Fed is still the captain of its own ship, this is good motivation for us to unpack the influence of the presidency on monetary affairs.”
Read more at Knowledge at Wharton.
