Words matter. As in advertising, how you sell your political message is as important as its content or design. Think of the success tax reformers had when they called the inheritance tax the “death tax.” Or how opponents of the president’s health-care law gathered political strength not only in rebranding the title of the bill from the Affordable Care Act but also in calling a medical reimbursements panel the “death panel.”
The Fed’s financial statements have long been audited by professionals, but Sen. Paul’s bill is not about that. Instead, he and those supporting his “audit” bill want the Government Accountability Office to give Congress annual reports on monetary policy functions of the Fed, or its core responsibilities.
If the same logic were applied to the private sector, then accountants would do far more than determine whether companies’ financial numbers are accurate: They would assess the performance of the business–something stock analysts do for public companies, and not always that well. What’s the issue here? Accountants are not trained to have experience in those businesses. Similarly, the economists employed by the GAO are no match for the economists at the Fed. It is not within their domain of expertise.
In creating the Fed, Congress established an expert, independent agency to manage the country’s monetary affairs. It’s fine for Congress to regularly asked the Fed, as it does other independent agencies, to report what it is doing. But why create, in effect, a “shadow Fed” elsewhere within the government, especially at time when lawmakers are trying to trim excess fat from federal spending?
If backers of the “audit the Fed” movement want to get rid of the agency, they should say so, and let that debate begin. If it does, central banks will win. No modern country operates without one, and it is inconceivable that the United States would prefer to have no central bank–and thus no way to fight financial panics other than to rely on Wall Street financiers, as was the case before the Fed was created (and policy makers had to trust J.P. Morgan to save the country). In the wake of the 2008-09 financial crisis, why would anyone want to embrace that approach?
If ending the Fed is not the objective, and “auditing” is the goal, this proposal is unnecessary and potentially dangerous. A well-established body of economic evidence makes clear that truly independent central banks keep inflation lower than in countries where finance ministries manage monetary affairs. Many of those who back “audit the Fed” legislation also want lower inflation. Clipping the Fed’s wings and politicizing monetary policy is hardly an outcome they should welcome.
Todd Stern speaks at The Economist’s Climate Risks Summit.