As the 2022 midterms enter the final stretch, there has been broad agreement that Democratic candidates have lost tremendous ground on economic issues, and never hit upon a sustained and coherent plan to regain it. For the most part, this line of argument has devolved into counterproductive zero-sum infighting within Democratic policy and campaign circles, pitting the issue of “the economy” against campaign pitches around abortion rights in the post-Roe era or the fate of democracy in the still-rampaging Trump one.
Lost in this regress of ex post facto priority-setting was a larger question: Just what should Democrats have been saying about the specter of inflation and other economic ills? And how can such an appeal stick among the electorate, given that Jerome Powell’s Federal Reserve had embraced an overt policy of wage suppression and economic contraction in its crusade to tame inflation? For President Joe Biden to persuasively campaign for the Democrats’ congressional majorities on the basis of his not-inconsiderable suite of pro-worker policy achievements, he would have to make a political enemy of the Trump-appointed Powell, a former senior partner at the multibillion-dollar private equity fund The Carlyle Group, whom Biden had serenely renominated at the outset of his term.
Biden and other Democratic leaders clearly made the calculation that any campaign-season swipe at Powell’s Fed policies would be out of bounds, but the recent history of the Fed’s fortunes in Washington shows that it was not always so. “There’s a whole spectrum of presidential pressure on the Fed, from doing nothing to things like Nixon did with [then–Fed Chair] Arthur Burns, leaking the minutes of Fed meetings directly to the press,” says Tim Barker, a fellow with the Jain Family Institute. “And Biden’s very much been on the ‘nothing’ end of that spectrum. He’s been one of the executives least given to even pressure the Fed slightly, like actively emphasizing in his messaging that his policy aims are at odds with Powell’s. There was never an open acknowledgment that Fed policy has been counterproductive to the aims of the Inflation Reduction Act, or the stimulus and infrastructure legislation.… You know, even Jimmy Carter, who stands out for doing almost nothing, did criticize [then–Fed Chair Paul] Volcker in October 1980. Biden has done less than Carter did, which is rather amazing.”
Powell’s recent austerian rule at the Fed has also benefited from a hands-off posture among ground-level economic forces on the left, albeit for different reasons. “Insofar as there was a progressive left economic message focused on macroeconomic policy, its leaders did not have their shit together the way people who worked on antitrust did,” says Marshall Steinbaum, associate economics professor at the University of Utah and former research director and fellow at the Roosevelt Institute. “There was this whole fight over macro policy from 2015 to 2019, where people like [former Obama Council of Economic Advisers Chair] Jason Furman were saying at the end of the Obama administration that we were at full employment, we didn’t need to continue expanding. The left critique then was that, no, we should be expanding, since wages are stagnant. They were right—but they misinformed themselves by thinking, ‘Well, we’re so right about the facts that we defeated our enemies.’… It didn’t really matter what the ideology was; so what if Powell was a Trump appointee?”
This is a common miscue in much of the public discourse surrounding the Fed and its policies; the technocratic aura of monetary policy-making tends to shield it from questions of political direction and power. But this assumption is a massive category error; few subjects are of more pressing political import than the question of just reward for workers, or access to cheap credit for borrowers. It’s simply that the Fed, which has been staffed at the highest echelons by banking and investment professionals, doggedly pursues policies that reflect the shared preferences and interests of that constituency.
That became clear the moment when the Fed board—now dominated by Biden appointees—fell promptly in line with Powell’s damn-the-torpedoes battle against inflation. The thinking among left-leaning policy hands was, “We won the ideological fight, and we won the personnel battle,” Steinbaum recalls. “But then it was like, ‘Oh wait, we got the board we wanted, then they changed their minds.’”
The resulting Beltway policy consensus around inflation and other issues has become greatly distorted ever since Powell launched his single-minded anti-inflation campaign this summer. For starters, federal spending is not producing inflationary spikes, as the GOP congressional field uniformly claims. “The federal government’s net contribution to aggregate demand has been negative for several months now,” Barker says. “So there needs to be better education around these issues. And people have a static view of the deficit, without thinking about the dynamic changes in government spending from one quarter to another.”
Robert Pollin, a Nation contributor and an economics professor at the University of Massachusetts, likewise notes that “in July and August, inflation was zero because of the decline in oil prices. I wish Democrats were saying it—I’ve said it to various audiences, and say, ‘How come I’m not seeing this in the news?’ Even last month, it was .04 percent, which annualizes to 5 percent, which is not a crisis level.” What’s more, Pollin says, these spikes in prices come chiefly from supply-chain issues and opportunistic margin-padding by businesses—not, as Powell and the Fed insist, “high wages—wages are increasing slower than prices are.”
Nor do executive and policy playing fields account for the only Fed-themed diffidence in Washington; Congress, too, has largely fallen silent on the Fed’s chosen monetary prerogatives, which has left Democratic lawmakers seeking reelection this cycle in much the same bind that Biden faced on economic policy: We want to be seen as tribunes of paycheck-to-paycheck working people over against the big-money corporate interests, yet we’re still fine with those interests’ making the most consequential calls about the overall direction of the economy.
Again, this deferential position is far from the norm in the broader sweep of Fed history. “The Burns Fed was under constant pressure of hearings from congressmen like [Wisconsin Democratic Senator] William Proxmire, and legislation to limit the Fed’s independence,” Barker says. “Humphrey-Hawkins”—the 1978 legislation calling for full employment—“was the weakest version of that. The result is that Burns looks today like he wasn’t independent, but he was thinking that if he did anything else, Congress would get rid of the Fed.” Massachusetts Democratic Representative Ayanna Presley has made some preliminary efforts to revive left-leaning oversight of the Fed, but as Barker notes, “compared to what happened in the 1970s and the ’30s, there’s no real pressure from Congress.”
The use of such pressure from the most representative body of government is all the more critical since, left to its own executive devices, the Fed very reliably leans firmly to the right in matters of political economy. James K. Galbraith Jr., the Lloyd M. Bentsen Jr. Chair in Government/Business Relations at the Lyndon B. Johnson School of Public Affairs at the University of Texas, published a study that “establishes very carefully that when the Democrats are up for reelection, the Fed pushes for a tighter policy, after you control for other factors, and a looser one when the Republicans are.” The reason is all too plain, Galbraith says: “The notion that the Fed is a nonpartisan institution is one the great myths of our time. It’s a bankers’ institution, and the Republicans nominate bankers to head it. These guys are all Republican party functionaries.” And frustratingly, Galbraith notes, Democrats typically prefer to pretend otherwise: “The Democrats generally appoint nonpartisan people, or reappoint Republicans”—as was the case with Biden and Powell, Barack Obama and Ben Bernanke, and Bill Clinton and Alan Greenspan.
One of the longest-serving chairs of the Fed, William McChesney Martin, took a more measured view of the Fed’s role in Washington, Barker says: “He said the Fed is independent within the government, but not from government. This didn’t mean it was something out of politics altogether. In an ideal world, that would be the conservative position, and our position would be more radical than that.” In a political world that looks poised to become a hell of a lot less ideal after November 8, we still need to reckon with a more fundamental truth, Barker adds: “The idea that the Fed should be independent from government is just wild.”