Sanders and Trump Might Actually Agree About the Fed

(Bloomberg Opinion) -- As unorthodox as President Donald Trump’s policies toward the Federal Reserve have been, Bernie Sanders’s could prove even more controversial. The question is whether, like Trump, Sanders allows his instincts to steer his Fed nominations or whether he takes a more pragmatic approach.

In many ways, of course, Trump and Sanders are polar opposites. Trump is a billionaire champion of capitalism who has cut taxes and regulations on businesses. Sanders is a self-proclaimed socialist who promises to tax billionaires out of existence and bring large swaths of the U.S. economy under government control.

At the same time, both men are populists who are skeptical about the benefits of trade and immigration who see the role of the president as the defender of U.S. interests rather than the leader of the free world. This odd bifurcation extends to their views on monetary policy.

Both Trump and Sanders have criticized the Fed for not keeping interest rates low enough. For Trump, the problem is that high interest rates have dampened the rise of the stock market and hampered his ability to conduct aggressive trade policy. The president’s hostility toward the Fed, combined with his multiple attempts to nominate sycophants to the Fed’s board, has also put the long-term independence of the central bank in question.

For Sanders, the problem is that the Fed’s focus on inflation puts the interest of savers above those of borrowers. The first group could see their retirement nest eggs eroded by a burst of unexpected inflation, while the second could see their debts diminish in real terms.  

As a senator, Sanders is free to criticize the Fed without raising concerns about its independence. As a presidential candidate, however, his choice in economic advisers creates some questions. Stephanie Kelton, the most public proponent of so-called Modern Monetary Theory, is a senior economic adviser on Sanders’s campaign (and a former colleague at Bloomberg Opinion).

Kelton has argued that the Fed not only should, but by law is required to, finance any level of spending the government desires. A central tenet of MMT is that any distinction between the Fed and the U.S. Treasury — let alone the bank’s independence — is false. Kelton and other MMT theorists are not shy about using their theory to argue for huge increases in the size and scope of government.

Would Sanders attempt to appoint Kelton and other followers of MMT to the Fed, or would he take a more pragmatic approach? There is no shortage of mainstream economists who believe the Fed should reduce its focus on inflation. That would go a long way toward achieving Sanders’s stated goals of increasing employment and reducing the interest burden on small businesses and other borrowers.

But the driving credo of the Sanders campaign is not evolution, it is revolution. And in monetary policy, a Sanders-style revolution is actually possible — so long as he goes about it in a sensible way.

To contact the editor responsible for this story: Michael Newman at mnewman43@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Karl W. Smith, a former assistant professor of economics at the University of North Carolina and founder of the blog Modeled Behavior, is vice president for federal policy at the Tax Foundation.

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