Stephen Moore is apparently upset that the media isn’t focusing on his economic ideas. I know this because he keeps bringing it up. “I was so honored when I got the call from Donald Trump. But all it’s been since then has been one personal assault after another and a kind of character assassination having nothing to do with economics,” the potential Federal Reserve nominee recently complained to a conservative radio station. “They’re pulling a Kavanaugh against me.” (Moore’s tax troubles, messy divorce, and back catalog of sexist magazine columns have dominated headlines about him lately.) This week, he even wrote to Politico with a reporting suggestion. “You should do a column about why no one wants to talk about my economic ideas, which is why the sleaze campaign is their only hope,” he told them.
As is often the case, Moore is spouting nonsense here. Plenty of writers have already panned his economic ideas. But since he’s so insistent, I’m happy to explain once again why his notions about central banking are a joke.
Moore, a former Trump campaign adviser who spent most of his professional life preaching the wonders of tax cuts, has admitted on at least a couple of occasions that he is “not an expert” on monetary policy. And it shows: His public comments on the topic over the years have mostly been limited to obvious partisan hackery. While Barack Obama was in office, Moore warned about phantom inflation and argued that the Fed should raise interest rates (which would have likely throttled the economy). Now that Donald Trump is in office, he has started warning about phantom deflation and argued that the Fed should cut interest rates (which would likely boost the economy).
But recently, Moore does seem to have adopted one Big Idea about how the the world’s most powerful central bank should do its job. In a March Wall Street Journal op-ed, he argued that policymakers ought to peg interest rates to a basket of commodity prices. As he put it:
The Fed should stabilize the value of the dollar by adopting the commodity-price rule used successfully by former Fed chief Paul Volcker. To break the crippling inflation of the 1970s, Mr. Volcker linked Fed monetary policy to real-time changes in commodity prices. When commodity prices rose, Mr. Volcker saw inflation coming and increased interest rates. When commodities fell in price, he lowered rates.
Moore seems to have made up this bit about Volcker, who told the Washington Post’s Catherine Rampell that he did not remember ever using the kind of rule Moore described. (There is zero historical evidence he ever did such a thing either.)
The bigger issue, however, is that making decisions about interest rates based on commodity prices is a potentially disastrous concept. In practice, it’s essentially a slightly souped-up version of the gold standard, another long discredited idea Moore previously said he supported. (He recently claimed not to remember ever having done so, but a lot of the supply siders Moore came up with in the 1980s were gold bugs.) The Fed would pick a basket of goods like oil, wheat, corn, copper, and so forth. If their prices rose, it would hike interest rates (thereby slowing down the economy). If their prices dropped, it would cut interest rates (thereby speeding up the economy).
It’s hard to say exactly why Moore thinks this is an optimal way to run the economy. He suggests it would “stabilize” the value of the dollar, which isn’t really true, since other countries’ currencies would still be free to fluctuate against it. The main benefit seems to be that if the Fed were following the rule in recent months, it would have cut interest rates, which would make Donald Trump happy.
Either way, Moore is not the first person to suggest the concept. Economists batted it around in the 1980s and 1990s—based on the theory that commodity prices might be a leading indicator that could tell us whether inflation was around the corner—before mostly deciding it was a bad idea. The reason why is obvious: Global commodity prices fluctuate for lots of reasons that have absolutely nothing to do with the United States. And as a rule, central bankers want to base their decisions based on things that have something to do with their own country’s economy. If rebels set fire to a pipeline in Nigeria or Iran gets sanctioned, oil gets more expensive. Soybeans, steel, and cement prices are driven by growth in China. There is absolutely no reason why the Federal Reserve should be making choices about whether to raise or lower interest rates based on the demand for beef in Chengdu.
Our current crop of central bankers (mostly) understands all of this. The Fed’s preferred measure of inflation, known as the Core Personal Consumption Expenditure Price Index, excludes food and energy prices because they are so volatile. Instead, it includes goods and services with prices that fluctuate more based on demand in the actual U.S., like housing, medical care, clothes, and education. Moore wants to do the exact opposite.
And what would happen if the Fed did follow a rule like Moore suggests? Over the past few years, it would have made some absolutely atrocious decisions. For instance, it would have had to hike interest rates in late 2008, just as the economy was getting ready to explode, because of the China-driven commodity boom. It would have also had to hike interest rates in 2011, when the economy was still gasping for air, essentially because of skyrocketing oil prices. That was the fateful mistake central bankers made in the European Union; it helped turn the recession into a disastrous depression the continent still hasn’t quite recovered from.
Just to make absolutely sure I wasn’t missing something, I called up Jeffrey Frankel, an economist at Harvard’s Kennedy School whose research has shown that commodity prices at least respond somewhat to monetary policy moves. He’s argued that central banks in countries that are economically dependent on commodity exports might want to formally base their interest rate moves partly on the price moves of that commodity. This makes some intuitive sense, since a lot of countries have to do that informally anyway (when the price of oil crashes, for instance, Russia sometimes needs to hike interest rates to keep the ruble from disastrously cratering with it). But if there was any argument whatsoever for doing it in a country with a large, diversified, heavily services-based economy like the U.S., I figured Frankel might have thought of it.
So, is there? No, there is not. “You could say it has advantages over the gold standard, but it has the same sort of nuttiness,” Frankel told me.