By Joseph E. Stiglitz
NEW YORK ( Project Syndicate )—President Joe Biden faces a critical decision: whom to appoint as chair of the Federal Reserve—arguably the most powerful position in the global economy.
The wrong choice can have grave consequences. Under Alan Greenspan and Ben Bernanke, the Fed failed to regulate the banking system adequately, setting the stage for the worst global economic downturn in 75 years. That crisis and policy makers’ response to it have had far-reaching political consequences, exacerbating inequality and nurturing a lingering sense of grievance in those who lost their houses and jobs.
There are a host of clichés about why the current chair, Jerome Powell, should be reappointed. Doing so would be a demonstration of bipartisanship. It would reinforce the Fed’s credibility. We need a seasoned hand to steer us through the post-pandemic recovery. And so on.
How important is continuity?
I heard all the same arguments 25 years ago when I was chair of the president’s Council of Economic Advisers and Greenspan was being considered for reappointment. They were enough to convince Bill Clinton, and the country paid a high price for his decision.
Ironically, President Ronald Reagan gave short shrift to these arguments when he effectively fired Paul Volcker in 1987, denying him reappointment after he had tamed inflation. Reagan owed Volcker a great deal, but because he wanted to pursue deregulation, he opted for Greenspan, an acolyte of Ayn Rand.
Economic policy-making requires careful judgment and a recognition of trade-offs. How important is inflation versus jobs and growth? How confident can we be that markets are efficient, stable, fair, and competitive on their own? How concerned should we be about inequality?
America’s two main parties have always had markedly different but clearly articulated perspectives on these matters (at least until the Republicans’ descent into populist madness).
Jobs are Job One
To my mind, the Democrats are right to worry more about the consequences of joblessness. The 2008 crisis showed that unfettered markets are neither efficient nor stable. Moreover, we know that marginalized groups have been brought into the economy and wage disparities reduced only when labor markets are tight.
The coming years are likely to test any Fed chair. The United States is already facing tough judgment calls concerning inflation and what to do about it. Are recent price increases mostly hiccups resulting from an unprecedented economic shutdown ? How should the Fed think about the African-American employment rate, which still has not recovered to its pre-pandemic levels? Would raising interest rates (and thus unemployment) be a cure worse than the disease?
Equally, while the mispricing of mortgage-backed securities was central to the 2008 meltdown, there is now evidence of an even greater and more pervasive mispricing of assets related to climate change. What should the Fed do about that?
Risks of climate change
Powell is not the man for the moment. For starters, he supported former President Donald Trump’s deregulatory agenda, risking the world’s financial health. And even now, he is reluctant to address climate risk, even though other central bankers around the world are declaring it the defining issue of the coming decades.
Powell would say that climate issues are not included in the Fed’s mandate, but he would be wrong. Part of the Fed’s mandate is to ensure financial stability, and there is no greater threat to that than climate change.