How an autocrat could wreck the economy

Donald Trump’s attacks on Fed independence should raise alarms

Per WSJ: “Trump allies draw up plans to blunt Fed’s independence.”

Former Trump administration officials and other allies have reportedly produced a 10-page document outlining ways that the central bank’s independence could be co-opted in service of the president’s political agenda, including the possibility of firing Federal Reserve Chair Jerome Powell from his chairmanship. 

But that’s not all — the document proposes having the president involved in setting interest rates. (Trump’s representatives noted the report was not “official.”)

To many readers, this may sound boring and technocratic — ”is the president not already involved in setting rates?” Perhaps that’s why the news didn’t get a lot of coverage. 

Indeed, Trump threatening the Fed is not new. In his first term, Trump regularly assailed the Fed and complained about its policies. Trump referred to Powell as an “enemy,” “clueless” and a “bonehead” because he was not cutting interest rates. And he reportedly asked White House lawyers for options on removing Powell as chair as far back as 2019. Trump also is not the first President to seek to influence the Fed when it comes to interest rates. Presidents have long recognized that juicing the economy through lower interest rates can help them get re-elected. Nixon, Reagan and Bush all reportedly sought to influence the Fed. Nor is Trump the first President to ask the question about firing the Fed Chair — Lyndon Johnson asked the same question in 1965 and was told he could not do so.

But what Trump is proposing is categorically different.

Complaining about interest rates and trying to influence the Fed is one thing. But proposals to have the president officially “consulted” on interest rate decisions, treated as “an ex officio member of” the Fed committee that sets interest rates, or even have the president serve as an “acting” member of the Fed’s board of governors represent a much starker blow at central bank independence. These proposals are in line with Trump’s other plans for a second term to gut the expertise and independence of federal agencies, suggesting that while they may sound far-fetched, they are not far removed from how Trump and his advisors imagine exercising power. 

Independent central banking is one of the great innovations of modern democracy

Central bank independence has been a long-standing norm in the United States and much of the western world. That’s because, as Georgetown University teaching professor Andreas Kern has written: 

[a] large body of economic research makes it quite clear: Placing monetary policy into the hands of an independent central banker, who bases decisions on evidence and data instead of populist ideals, leads to lower inflation and greater economic stability – key ingredients of a strong economy.

The IMF has concluded the same. Thus, for example, the Federal Reserve Act provides that the president can only dismiss a Federal Reserve Governor “for cause.” And similarly, the Maastricht Treaty that created the European Central Bank endowed it with independence.

In short, central bank independence — putting the most easily abused economic tools out of the hands of short-sighted elected officials — is a cornerstone of modern democracy. 

Autocratic control of central banks tends to have disastrous consequences

The world has learned the cost of political meddling as well. 

Turkey’s counter-intuitive approach to fighting inflation under strongman Recep Tayyip Erdoğan had a devastating impact on the value of its currency. And Erdoğan’s repeated firings of central bank governors — one of the moves that Trump inquired about and that his allies are mulling over — similarly hurt the local currency and foreign investment. 

In Venezuela, Hugo Chavez's rubber stamp assembly enabled him to take over the Central Bank in 2007 — barely eight years after the Bank secured its independence. Confirming economists’ fears, by 2014 inflation was among the highest in the world, eventually rising to 2,000,000 percent (not a typo, two million percent).

In all these cases, autocrats have shown a willingness to wreck their national economies by focusing on shoring up political support — and thus increasing power — in the short run. But, as the Washington Post’s Catherine Rampell writes, “what seems politically smart in the short run is not always good in the long run.”

Indeed, research shows that while autocrats get a “quick bump” in economic indicators when they first take power and take steps to juice the economy by cutting rates or increasing government spending, over time, autocratic countries perform worse economically.

Business leaders should be worried

The upshot? Trump has proven that he is not constrained by the norms that have guided and constrained other presidents. Particularly in light of the potentially weakened legal protections afforded to Federal Reserve governors against removal from office following recent Supreme Court rulings, Trump’s persistent attacks on Powell in his first term and Trump’s reported intentions to bring other independent agencies under presidential control, there is every reason to believe that the plans being hatched by his allies may well be carried out in a second Trump administration.

Business leaders who rely on stable economic conditions and monetary policy geared to long-term economic growth should take note. 

While some of Trump’s policy positions may appear to be pro-business, Trump’s plans for governance are decidedly not. History has shown that similar accretions of executive power exercised at the whims of a leader tend to undermine both long-term economic performance and the rule of law that undergirds free and competitive markets. 

Neither outcome is ultimately business friendly.