Federal Reserve and Class in the United States

Political Science is turning up some interesting biases. It is now known that undecided voters are very partisan and probably have made their mind up already based on those biases. Another new data point is that the federal reserve behaves differently when a Democrat is in office than when a Republican is.

The Federal Reserve Bank behaves very differently when the White House is occupied by a Democrat than when it is occupied by a Republican. The Fed Funds Rate, the primary lever used by the Fed to manage the nation's economy, tends to rise during Democratic administrations and fall during Republican administrations. This pattern may help explain why Republicans have controlled the White House more frequently than Democrats in recent decades.

For pollsters like Nate Silver who use a fundamental form of modeling which takes into account the economy as a baseline for re-election, the so-called federal reserve being hawkish on inflation when a Democrat is President and a Dove when a Republican is can lead to a different baseline for Democratic incumbents and challengers.

This poses a real issue as the Federal Reserve is supposed to be politically independent. One of the reasons for a politically independent Federal Reserve bank is that monetary decisions will be based upon the good for the economy rather than for the good of whichever political party is in power. Both the Washington and Westminster system have moved in this direction believing that an independent central bank is good policy.

The US has seen more inequality than most countries during the neoliberal period from the 1970s to today, and even after the big financial crash of 2007, in equality has intensified in the US. We see CEOs arguing that the deficit is the biggest problem facing the US rather than unemployment.

It is possible that this partian nature of monetary policy from the federal reserve is an outcome of this inequality. It looks like the US is moving to a class society in one way or another which is really sad if that is the case. The amazing political economy that brought us the first man on the moon, the internet, the iphone and universal internet search is sadly unwinding itself from its potential over class bias.

More: Matthew O'Brien has a counter view of the same study:

In other words, there hasn't been a persistent bias -- though there may have been in the 1970s -- and both parties have plenty of reason to say the Fed has helped their political opponents. ... Central bankers are human, and like the rest of us humans, they have political preferences. Sometimes -- ahem, Alan Greenspan -- they act on those preferences, but for the most part they do not, at least in the post-Volcker period. Central bankers are technocrats first, humans second.

O'Brien argues that the Federal Reserve were acting like technocrats first rather than partisans, subconscious partisans or humans.
cam 2012-10-25 22:10:33.0
adam : There's an argument that before the advent of full blown Bush II profligacy this would be due to a rational expectation of Democrats introducing a fiscal stimulus. The big government programs of the 20th century, basically. So in a sense the Fed had a responsibility to prepare for that incoming stimulus by not overheating with loose monetary policy.

Blind Freddie can see the current GOP hardly inspires such confidence in balanced budgets; one would expect the Fed to adjust correspondingly.