“This is a way to shake your fist at the big bad Fed, and it’s not a good way.”
That was Barney Frank (D-Massachusetts) on the House floor yesterday, summing up the opposition to Ron Paul’s (R-Texas) “Audit the Fed” bill. After decades of introducing bills to either audit or end the Fed (proposals routinely ignored by both Republican and Democratic majorities over the years), Ron Paul finally got his day in the Congressional sun. Every House Republican save one and almost a majority of House Democrats voted for the bill, easily securing the supermajority necessary to pass Ron Paul’s bill. If the Senate and the president were to follow suit (which they won’t), the GAO would gain access to the Fed’s monetary policy discussions, opening the Fed’s books and doors to the public for review.
Given Republican ire against Ben Bernanke and his Fed, no one was surprised to see Republicans line up nearly lock step in favor of Ron Paul’s audit bill. But it’s harder to account for the 88 Democrats who bucked their party’s leadership and threw in their lot with Ron Paul. The graph below shows the marginal effects of several constituency and member characteristics on Democrats’ likelihood of voting for Ron Paul’s bill.
Three effects stand out. First, Blue Dog Democrat—typically representing conservative districts in Red-leaning states—were forty percent more likely to support the bill than their more liberal colleagues. Second, Democrats who won a close race in 2010 were nearly thirty percent more likely to vote for the bill than their more electorally secure colleagues. Not surprisingly, the Fed’s low public standing encourages endangered Democrats to throw their own punches when Republicans take out their Bernanke punching bag.
Finally, Democrats whose districts are home to one of the twelve Federal Reserve district banks are roughly ten percent less likely than their party colleagues to gang up on the Fed—even after controlling for electoral and constituency effects. Remarkably, by dint of distributing the reserve banks to cities across the country, the framers of the Fed may have hard wired support for the Fed far beyond Wall Street. Even on a bill that has no legislative legs, these reserve bank Democrats had second thoughts about siding with the Fed’s critics. Granted, the effect today is confined to Democrats, and at ten percent is relatively small. But it’s good news for an institution in dire need of any political support it can get.
{ 9 comments… read them below or add one }
Sarah:
Could you please explain (a) why this bill is a bad idea and (b) why one should expect Democrats to oppose “opening the Fed’s books and doors to the public for review,” (c) why you consider it good news that Democrats in districts with Federal Reserve banks are ten percent less likely than other Democrats to vote for the bill. You could just as well rephrase (c) as saying that Democrats in districts without Federal Reserve banks are ten percent less likely etc. Would that then be bad news for the institution?
These are not trick questions; I honestly have no idea of the answers. If I’d been asked before reading this blog entry, I would’ve guessed it was the Democrats who would want to audit the Fed, and Republicans who wanted to limit disclosure. It sounds like an Occupy Wall Street sort of thing, kind of like the recent debate about disclosing campaign contributions. Clearly my intuitions are wrong here.
Is it just that a Democrat is president and so Democrats are supporting the executive branch? Or is there something else going on? I understand that some Republicans such as Ron Paul support the gold standard etc. but that certainly couldn’t explain the massive support for the bill. If the bill is purely symbolic, a statement of distaste for the Federal Reserve, then I would’ve expected most Democrats in the leadership to support it also. I thought liberal Democrats were unhappy with the Federal Reserve for doing to little. What would Krugman say?
Andrew– Thanks for commenting. All good questions. A few thoughts:
First, I personally am agnostic on whether this is a good or bad bill. (I should have been clearer in my comment that pockets of Democratic opposition to the bill was “good news.” I meant to imply that it was good news *for the Fed*, whose ability to make appropriate monetary policy choices is arguably made easier when it faces less criticism. If some level of support for the Fed is baked in by virtue of its regional structure, I think that’s good news from the Fed’s interest in preserving its policy autonomy.)
But more to your question – what’s the basis for opposition to the bill? Economists typically argue that countries with more independent central bank tend to have lower levels of inflation. Opponents of the bill, including Bernanke, argue that additional oversight of monetary policy decision-making by auditors would put independence at risk, undermining the Fed’s insulation from political pressure (and thus its ability to deliver low inflation and better economic results). To be sure, the Fed is already audited by the GAO. Opponents of the bill object to the additional oversight that gets closer to FOMC decisions on interest rate setting and other matters.
Second, you raise a good question about the parties’ positions on the bill. I think your intuitions are right: Given typical Democratic and Republican positions re: Wall Street and financial regulation, we might expect Democrats to support a transparency bill opposed by the Fed and Republicans to oppose the bill, rather than the other way around. (Or, as you suggest, if this is a pro-transparency bill that is unlikely to become law, why wasn’t the vote 435-0?) My guess is that this is partially a move by House GOP to appeal to a populist streak in Republican constituencies. It’s also possibly a function of partisan (not ideological) polarization. Once Republicans stake out a position on a bill, Democrats often take the opposite side (regardless, as Frances Lee’s 2009 book shows, of the underlying ideological content of the bill). Also, if the Fed is the only possible source of more stimulus in the short term, Democrats might be reluctant to side with Ron End-the-Fed Paul.
In any case, points all well-taken.
P.S. I like the graph but I think there’s something wrong with the calculations that went into it. If the avg probability is about 50%, how can you have effects that can go as high as +0.6 or -0.6? This would take the probability to above 1 or below 0. Also, the last dot that is so close to 0, that’s a bit misleading as it is for a coefficient that needs to be multiplied by a percentage. I’d recommend rescaling that predictor so its coefficient can be interpreted along with the others.
Thanks for the guidance. I will re-scale and recheck.
On a related note — yesterday proved that if, as a member of Congress, you are annoyingly and persistently uncompromising in your positions, and generally make a habit of annoying your colleagues, you might, if you’re lucky, get one of your legislative initiatives passed at the end of your 20-year career. Who needs compromise?
Professor Gelman,
The Fed’s balance sheet and a lot of other useful data is already open to the public to review. See here: http://www.federalreserve.gov/monetarypolicy/bst.htm .
Congressman Paul’s bill’s name implies that the Fed is not audited, and that if the bill becomes law, then it will be audited.
It’s silly to imagine that the Fed does not have auditors working for it or that the Fed is not audited. It’s silly to imagine that the Fed’s congressional oversight committees don’t have access to this data.
What is the source of your quotation that this bill is about opening the Fed’s books?
Whatever this bill is about, it is not about audits or transparency.
Bernard:
Sarah’s post above is the source of my quotation that this bill is about opening the Fed’s books. She wrote, “If the Senate and the president were to follow suit (which they won’t), the GAO would gain access to the Fed’s monetary policy discussions, opening the Fed’s books and doors to the public for review.”
Allow me to send a life-line to Andrew (or to save myself, I suppose). You are correct. The Fed and its reserve banks are already subject by statute to audits by the GAO. The Fed and sometimes the reserve banks also contract with non-governmental auditors. So yes, one might reasonably say that the Feds “books” are already open. That said, current law does not grant GAO unfettered authority to review decisions made by the Federal Reserve and its open market committee. The House-passed bill would remove the remaining restrictions on GAO auditing authority. This is what I (too loosely, perhaps) referred to as opening of the Fed’s “books and doors.” Those current restrictions preclude GAO access to deliberations, decisions, and actions on monetary policy matters, including communications among members of the Board of Governors and the reserve banks.
To be sure, the FOMC releases minutes of its sessions three weeks after it meets. And the Fed releases FOMC verbatim transcripts after a five-year embargo. My sense is that Bernanke has objected to both shortening the transcript embargo period and granting the GAO contemporaneous (and ex post) access to FOMC deliberations and communications. (Of course, there’s nothing sacrosanct about the five-year embargo period. Why five years?)
the FED is runing a fraud upon america. it has a money printing monopoly that is designed to perpetrate and support and owner/employee owner/youpeople master/slave owner/tenant style of control and distribution. it is wicked and will ultimately result in the worlds most corrupt and evil oligarchy you can imagine.