Greg Mankiw, Harvard economics professor, worries about the fact that Chairman of the House Banking Committee, Barney Frank, has decided to add a day to the semi-annual Federal Reserve testimony to give economists and labor experts a chance to have their say. Having other witnesses is a new step, and Mankiw sees it as a threat to Fed independence:
Today’s Wall Street Journal reports:
Fed Chairman May Face Heat At Hearings
When Federal Reserve Chairman Ben Bernanke testifies on monetary policy next month, he is likely to get far more scrutiny than usual.
By law, the Fed chairman must testify twice a year to Congress: in February and July. Ordinarily, each installment lasts two days, one before the Senate Banking Committee, the other before the House Financial Services Committee. There are no other witnesses.
In a break with that tradition, Barney Frank, the Massachusetts Democrat who took over the House panel this month, said he plans to hold an additional day of hearings in which witnesses, such as economists and labor experts, will give their views on what Mr. Bernanke said.
The Fed is a creation of Congress, and the Congress surely has the right and duty to oversee the central bank. On the other hand, many economists have argued that an independent central bank performs better than one more closely tied to politics. A classic reference on the topic is Alesina and Summers. After reading a story like this, one might worry that more Congressional scrutiny will translate into less Fed independence and, if Alesina and Summers are right, worse macroeconomic outcomes.
This isn’t as bad as Mankiw makes it sound. If you read the Journal, the piece is much less alarmist than the headline. Frank says that while he opposes an inflation target, it is within the Fed’s purview to pursue one, and he is also impressed with Bernanke’s performance.
It sounds that Frank may be less deferential towards Bernanke than Congress was towards Greenspan, but let’s face it, Congress fawned over him. And since what Greenspan said was impenetrable, had someone taken him on, it would have been hard to get a foothold.
Frank sounds as if he has no intention of clipping the Fed’s wings (and even if he did, it is hard to imagine that he would have support on the committee). The Fed chairman has been described as the second most powerful man in the country (OK, counting Cheney, Bernanke must be number three). Having him answer for all of the ramifications of Fed policy is a useful exercise (and it’s good for him to practice now while the economy is doing well).
Congressional appearances are more theater than substance anyhow. I am reminded of a joke by Rodney Dangerfield:
If you rob $10,000 from a convenience store, you go to jail for ten years. If you rob $100 million from a company, you get called before Congress and called bad names for half an hour.