What Project 2025 Says About the Fed – Tribune

By Jonathan Newman

The Mandate for Leadership 2025 is an unofficial blueprint for a possible conservative administration, published by the Heritage Foundation’s 2025 Project. Donald Trump has distanced himself from the project, although many people associated with his first term as president contributed to the document.

The project is billed as “the comprehensive policy guide for a new conservative president, offering specific reforms and proposals for federal departments and agencies, drawing on the expertise of the entire conservative movement.” Paul Dans, the director of Project 2025, says the project aims to “deconstruct the administrative state.”

Chapter 24 of the 922-page document focuses on the Federal Reserve. It was written by Paul Winfree, a distinguished fellow in economic policy and public leadership at the Heritage Foundation.

The chapter is decidedly anti-Fed—it calls for abolishing the Fed and returning to a commodity-backed currency—but it also suggests more politically palatable reforms that would only limit the Fed, in case the most radical measures prove unworkable. Winfree lists the proposals “in descending order of effectiveness against inflation and boom-and-bust cycles.” Free banking (which involves abolishing the Fed) and a return to commodity money are listed first.

Overall, this chapter presents an excellent, if brief, critique of government intervention in money and banking. It criticizes the Fed for exacerbating the boom-bust cycle, inflating the value of the dollar, enabling exorbitant federal deficit spending, picking winners and losers in financial markets, and increasing its own power in every crisis.

From a Misesian-Rothbardian perspective, this book has some Friedmanian flaws. But assuming Donald Trump doesn’t read and adopt Rothbard’s views in What Has Government Done to Our Money?, this book is far better than the lukewarm, pro-Fed advice given by “right-wing Keynesians” in the 1980s and 1990s. (See “Clintonomises: The Prospects” in Making Economic Sense for more.)

The influence of Friedman’s monetarism is not limited to third-, fourth-, and fifth-order political compromises. The chapter begins with an error: “Money is the essential unit of measurement for the voluntary exchanges that constitute the market economy.” The idea that money is a unit of measurement leads to a multitude of errors in monetary theory, which lead to the conclusion that the purchasing power of money must be stabilized.

In fact, it was this idea that led to the creation of the Fed. Winfree acknowledges: “The Federal Reserve was originally created to ‘provide elastic money’ and rediscount commercial paper so that the supply of credit could increase as the demand for money and bank credit increased.” Winfree argues that the Fed’s ability to stabilize the purchasing power of the dollar is hampered by the full-employment aspect of its dual mandate and by discretionary, as opposed to rules-based, monetary policy. Rather than attacking the Fed on more fundamental grounds—namely, that the Fed’s original rationale was fallacious—Winfree accepts that rationale and says the Fed is not doing a good job of doing that.

The chapter also discusses Friedman’s diagnosis of what prolonged the Great Depression, but does not cite it. According to Friedman, the Federal Reserve failed to prevent the collapse of the money supply from 1929 to 1933, and this is what caused what would have been an “ordinary recession” to become the Great Depression. Winfree alludes to this diagnosis in more general terms: “The Great Depression of the 1930s was needlessly prolonged in part because of the inept management of the money supply by the Federal Reserve.” Of course, those who have read Rothbard’s America’s Great Depression know that it was the monetary expansion allowed by the Fed in the 1920s that led to the inevitable crash, and that the depression of the 1930s was prolonged because of the multitude of interventions by Hoover and FDR. Bank failures and the concomitant collapse of money and credit actually contribute to the adjustment process by liquidating poorly managed banks and realigning the supply of credit with real savings.

The influence of Friedman and the Chicagoans is particularly visible in the policy proposals put forward as alternatives to the Fed’s demise. Friedman’s “K percent rule” is cited after the proposal to return to a commodity standard. The “K” refers to a fixed growth rate in the money supply—Winfree cites 3 percent per year as an example. The idea is to remove discretion from the central bank altogether, as do the other proposed rules: the inflation-targeting rule (which Winfree acknowledges is already somewhat in effect at the Fed), the Taylor rule, and the nominal GDP targeting rule.

A major problem with all these rules (apart from the fact that discretion can be a good thing) is that they are arbitrary. Why a fixed money supply growth rate of 3%? Why should we have a price inflation target of 2%? What weights should be applied in the Taylor rule? Why should nominal spending be stabilized? To understand why any explicit or implicit target is arbitrary, consider what we would see in an unfettered market economy.

In a changing economy, we would likely see constant (but not fixed) price deflation, driven primarily by increased production of goods and services. This assumption is consistent with historical experience, particularly in the 19th century: “Throughout the 19th century and up to World War I, a mild deflationary tendency prevailed in industrialized countries, as rapid growth in the supply of goods outpaced the gradual growth in the money supply that occurred under the classical gold standard.”

But this does not justify a monetary policy that aims at a fixed rate of price deflation, for the same reason that we should not set the price of anything according to what we assume to be a natural tendency. The economy is constantly changing, as values ​​change, the stock of known natural resources changes, technology is invented, and savings preferences change, among other factors. This is why Mises called stabilization policy “an empty and contradictory notion” (Human Action, p. 220). Winfree has the merit of acknowledging that without a central bank, “the norm is for the purchasing power of the dollar to increase gently over time, reflecting gains in economic productivity.” However, this point seems to be lost sight of once the rules of monetary policy are discussed.

I am not against taking incremental steps to reduce government power, but the proposed rules look more like steps backward or detours. For example, if the Fed were to explicitly commit to the Taylor rule, it would likely reinforce the image of an impartial, scientific agency that uses sophisticated models and tools to manage the macroeconomy.

These issues, along with a few other minor points (such as the assertion that fiscal policy is acceptable if it is “timely, targeted, and temporary”) prevent me from giving this chapter an A+. But I do agree wholeheartedly with the anti-Fed spirit and statements like these:

One of the major problems with government control of monetary policy is its exposure to two inevitable political pressures: the pressure to print money to subsidize government deficits, and the pressure to print money to artificially stimulate the economy until the next election. Since both pressures will always exist with self-serving politicians, the only permanent remedy is to take the monetary wheel out of the hands of the Federal Reserve and give it back to the people.

It seems to me that all alternative reform ideas involving “rules-based monetary policy” are dead due to these political pressures. Rules are easily bent and abandoned when the political winds change. We should just eliminate the cancer and replace it with nothing.

• About the Author: Dr. Jonathan Newman is a Mises Institute Fellow. He received his Ph.D. from Auburn University while a Mises Institute Research Fellow. He is the recipient of the 2021 Gary G. Schlarbaum Award for Promising Young Scholarship for excellence in research and teaching. Previously, he was an Associate Professor of Economics and Finance at Bryan College. His publications include: Quarterly Review of Austrian Economics and in volumes edited by Matthew McCaffrey and Per Bylund.
• Source: This article was published by the Mises Institute