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Full employment is the most important thing the Fed can do to fight climate change
The question that matters is whether Powell is the right Chair to deliver it
For a long time, I took it for granted that Joe Biden would reappoint Jay Powell for a second term as Federal Reserve Chair. Powell has done a good job, most presidents reappoint the chair they inherited, and Biden has instincts in favor of bipartisanship. Then in July, Bob Kuttner wrote an anti-Powell column declaring that while he’d done a good job on monetary policy, “Powell has been dismal on the Fed’s other job — financial regulation” and also that “my sources say the decision hasn’t been made yet, but Biden is likely to name a new Fed chair.”
Kuttner was my first boss in journalism, and though he’s neither a classic D.C. insider (indeed, he lives in Massachusetts) nor scoop-slinger, he does often know what he’s talking about, and in particular, I think he has a close relationship with the team of a certain United States Senator who lives in the Boston area and has an intense interest in financial regulation.
Still, the idea that Elizabeth Warren would convince Biden to ditch Powell over a financial regulation argument seemed far-fetched. After all, whatever you make of Powell’s record on financial regulation, it’s just not the case that Joe Biden is pursuing an aggressive financial regulation agenda that is somehow being stymied by Powell. So why would Biden pick a fight over a policy area where he’s not even doing anything? Analytically it didn’t make sense, even if you agree that in some abstract sense Biden should care more about this.
But the Dump Powell movement has only gained steam over time and has now become a bona fide Progressive Cause and intra-party fight, with members of the Squad weighing in that Biden should ditch Powell and “re-imagine a Federal Reserve focused on eliminating climate risk and advancing racial and economic justice.”
On the flip side, the members of the small community of center-right full employment hawks are losing their shit over this possibility. Over at the great new blog Full Stack Economics, Alan Cole has a column arguing that “Replacing Powell Would Be a Blunder for Biden.”
I am trying to be a better rationalist, which means articulating feelings on this matter that are somewhat ambivalent. My view is that Cole is overstating things here. Replacing Powell might be a blunder, but it might work out fine. I think the Ditch Powell caucus is making mountains out of molehills in a way that doesn’t really make sense. And I find it deeply odd that they are mostly pushing to elevate Lael Brainard to the Fed Chair job when, in many cases, literally the exact same people waged a bizarre campaign to spike her as a potential Treasury Secretary.
But it’s good to focus on strong arguments rather than weak ones, and while I find Brad DeLong’s case for Brainard to be overstated, it’s not crazy. This is a much worse headline than Cole’s, but I think I would sum up my feelings as “Replacing Powell Would Be a High-Variance Choice With a Negative Expected Value for Biden.”
I used to favor ditching Powell
When the results of the 2020 election came in, I assumed that Biden would spend his first term wrestling with the same problems Obama faced in his first term: a severely depressed economy and a Congress that was not willing to engage in the level of fiscal stimulus that the situation warranted. I also assumed that Biden, like Obama, would face pressure to gain “credibility” by reappointing the Republican Fed chair who he inherited from his predecessor.
I thought that Obama made a mistake by doing that — a mistake that Biden should avoid repeating. There wasn’t anything so awful about Bernanke, but there were two issues. One was it was natural that Bernanke, a Republican with ties to GOP economic policy circles, was just not particularly enthusiastic about Barack Obama’s policy ideas. On the margin, he was disposed to make decisions that made Obama’s results look bad rather than decisions that made his results look good. I wouldn’t allege conscious sabotage here; it’s just natural. If you think the president and his allies in Congress have bad ideas, then you might see yourself as being asked to make risky monetary moves to cover for their mistakes and be disinclined to do that.
The other is that the credibility point was wrong. Given the strongly deflationary atmosphere and generally depressed conditions of the Obama-era economy, making people think that the president had installed some Democratic Party hack who only cared about helping vulnerable House Democrats in the midterms would have actually been quite constructive. A lack of credibility would have raised expectations of nominal income growth and encouraged more private business investment.
It’s true that rich businessmen would have gone on CNBC and complained about Obama. But in a practical sense, their fears of an inflationary climate would have boosted the economy. Economic policy in the Tim Geithner Era was always excessively tilted toward a concept of “confidence” that centered the subjective feelings of businessmen rather than a model-based analysis of the interplay between nominal expectations and real growth.
In that context, I was gung-ho about replacing Powell with a Democrat. But I wanted it to be a real Democrat. Not a Janet Yellen type like a distinguished academic who happens to be a Democrat. But a person whose primary career was in Democratic Party economic policy — someone like Brainard or Jason Furman who would be knocked specifically on credibility grounds.
But the actual situation in September 2021 is not the one that I was anticipating in November 2020.
The facts have changed
As I wrote in June, the economic situation turned out to be way more inflationary than I believed it would be late last year.
There are a bunch of reasons for that, but the main reason is the fiscal policy environment turned out to be very different than the one Obama dealt with. That started with Mitch McConnell agreeing to a $900 billion lame-duck stimulus plan to try to help Republicans win the special elections in Georgia. But then they lost those races anyway, giving Democrats a razor-thin majority in the Senate. Then Biden asked for a really big $1.8 trillion rescue package. When his team proposed that, my initial instinct was that they were tossing out a giant number, figuring they would settle for much less in Congress. But to my surprise, moderate Democrats in Congress basically gave Biden what he asked for.
This all added up to a lot of fiscal stimuli. And in an effort to avoid some of the perceived mistakes of the Obama years, that money was really front-loaded and not especially targeted, erring on the side of giving demand a swift kick in the pants.
And it worked. We’ve had a very demand-stimulated economy, but unfortunately, things on the supply side of the economy have not worked out as well. Some of that has been bad luck in the supply chain, some of it has been anti-vax sentiment and Delta, some of it has been the surprising (to me, at least) decision to stick with Trump’s tariffs, and I think some of it is that the Unemployment Insurance provisions weren’t very well-designed.
To make a long story short, though, we finally have macroeconomic policy that is erring on the side of aiming for full employment, even at the risk of non-trivial inflation. And that’s awesome. It’s exactly what policymakers should be doing. But it changes the calculus around Powell in two ways:
Credibility is actually helpful under these circumstances. We want people to think that the inflation situation will get better rather than worse over time. Bipartisan credibility didn’t do Obama any good because there was no inflation to be credible about. Biden has actual inflation, so credibility is useful.
Powell has been put to the test. I appreciated his eventual embrace of full employment monetary policy under Trump, but people do a lot of things when a president they agree with is in office. I wouldn’t have been shocked if Powell had responded to the rise of inflation by saying “yep, these Democrats fucked up, and now I need to clean up the mess by raising rates.” But he hasn’t said that. He’s made a full-throated defense of full employment and called for patience on withdrawing stimulus.
Now, this could all be a big fake-out designed to get Biden to reappoint him, at which point Powell will turn into a GOP hawk. But compared to where I was 10 months ago, my estimation of Powell has risen and my estimation of the utility of bipartisan cover has also risen.
Bad arguments against Powell
It is true that Powell is laxer on bank regulation than he probably should be, but it’s hard for me to see this as a huge deal worth blowing up his chairmanship over.
There isn’t a big financial regulation policy dispute happening in Washington right now. Biden hasn’t named a chair or an enforcement director of the CFTC. Rohit Chopra was tapped to run the Consumer Financial Protection Bureau back in February, but the Senate hasn’t voted on his confirmation. And at the Fed, the lead official on financial regulation is not the Chair, but the Vice Chair for Regulation, where we also have a Trump-era holdover in Richard Clarida. So there’s both lots of low-hanging fruit for Biden to pick if he wants to get more rigorous on financial regulation and also not a clear upside to picking a fight with regard to Powell’s job.
But even though the case against Powell started with financial regulation, it’s the arguments grounded in climate change that have really caught fire.
This made so little sense to me that I initially thought I was missing something. The key jobs on climate are obviously at EPA, Interior, and Energy with a sideline into Transportation and HUD, and of course a critical role for judicial nominations. But fortunately, Robinson Meyer (who knows way more about climate policy than I do) wrote a good piece about the bogus climate case against Powell. As he makes clear, it’s not that there’s no climate role for the Fed; it’s just that it’s not very important. You could hassle banks to talk more about their exposure to climate risk when you do stress tests. And the activists seem to have convinced themselves that you could use the Fed to throttle fossil fuel investment.
The idea is that you could say that due to the urgent need for decarbonization, it’s possible that fossil fuel assets will rapidly lose all their financial value. Since they are so risky, the safety and soundness of the banking system require you to offset them with larger capital buffers. That would raise the cost of engaging in fossil fuel lending, thereby making fossil fuel projects less likely to be undertaken.
But this is totally fantastical. It’s like saying that Merrick Garland could slap handcuffs on every executive whose company drills for oil in the United States and charge them with crimes against humanity for their culpability in the climate crisis. You could imagine a world in which the political system and the courts would support that line of attack, but if that were the case, you’d also have the political support to ban fossil fuel extraction. There’s no indication that Lael Brainard wants to abuse Fed regulatory authority to impose a backdoor carbon price, no reason to think the Senate would confirm her if there were a general understanding that this was her plan, and no reason to think that kind of regulatory adventurism would survive in court.
If you’re a pesticide manufacturer who wants to keep dumping neurotoxins into drinking water, it’s true that you can get the Trump administration to do you a low-salience regulatory favor that is later reversed by Joe Biden. But climate change is a really big deal. You’re not going to trick people into remaking the entire energy system without noticing. And the whole idea that a Brainard Fed would even try is a little bizarre. I would also note that the progressive groups pushing the Dump Powell agenda specifically criticized Lael Brainard as unlikely to pursue envelope-pushing climate regulations back when she was under consideration to be Biden’s Treasury Secretary.
Full employment matters most
As Meyer says, the best thing the Fed could do for climate change is to deliver full employment.
That’s true in that it’s good for climate if Joe Biden is seen as a successful president who delivers good economic results. And it’s true in that radically restructuring the energy system necessarily involves a lot of job churn, and that’s much more tolerable in a full-employment environment. If Powell is the full employment choice, then he’s the right choice for climate. All the rest is a distraction.
So is he the full employment choice?
I say 70% yes. He’s proven his mettle over the past three months, the bipartisan cover and credibility he gives Biden is genuinely useful, and there is a risk that if you fire him, he gets replaced by someone worse.
Atlanta Fed President Raphael Bostic is aggressively pursuing the job, and I think he might plausibly get it. I like Bostic as a housing economist, appreciated his work at the Obama HUD, and think he’s brought some useful perspectives into the mix since joining the Fed. But on the core monetary policy topic, he is relatively hawkish, certainly more so than Powell.
Brainard, by contrast, is great on monetary issues and full employment. I do think some full employment enthusiasts have gotten so annoyed by the scattershot and wrongheaded nature of some of the anti-Powell arguments that they have given short shrift to this. She was actually more of an intellectual leader in the Fed’s turnaround than Powell was.
This leads us to Brad DeLong’s case for Brainard, which is similar to my view from last year: it’s dangerous for a Democratic Party president to entrust the economy to a Republican Fed Chair. As I laid out above, I’ve moved away from this position in response to events. But unlike Cole, I don’t discount it entirely. I feel like picking a political fight over this would be a risky move for Biden, but I could certainly imagine it working out well or reappointing Powell working out poorly. This is the kind of thing where being president is just a really tough job.
What is the climate left doing?
Where I feel on firmer ground is once again asking What Is The Climate Left Doing?
Of all the possible things you could be doing with your time and money, why pick a fight about the Fed Chair job and start funding financial regulation groups to devise this slightly loopy notion of crippling fossil fuel investment through backdoor bank regulation?
And the answer is that the climate left has a misperception that the Democratic Party desperately needs to be pushed toward more aggressive climate action, and that therefore finding fights to pick — even weird and unimportant ones — is constructive.
The reality is that Democratic Party elites — members of Congress, liberals in the media, Biden executive branch employees, foundation officers, etc. — are in practice all much more fired up about climate change than the median voter, or even than the median Democratic Party voter. Climate activists have won the intra-party argument, and Democrats push hard on climate issues because they sincerely believe the issue is important. They are held back in this regard by the tilted electoral maps that give more weight to non-college rural white people’s preferences and they have bestowed on the Democrats a razor-thin majority that’s dependent on senators from West Virginia and Montana. But they are also held back by the preferences of the electorate, which is loosely favorable to climate action but very averse to anything that smacks of personal sacrifice or disruption.
It’s simply a difficult problem. But the answers involve things like helping Democrats be popular and win elections and actually convincing more voters to care more about climate change. The idea that you’re going to fix this by sneaking in a climate-friendly Fed Chair is silly, and trying to craft a narrative whereby Biden is betraying climate activists if he makes a safe Fed appointment is absurd.