Shelton the Charlatan

BERKELEY — Back in September 1994, the Nobel laureate economist Milton Friedman actually wrote about one of US President Donald Trump’s current nominees to serve on the Federal Reserve’s seven-member Board of Governors. “In a recent Wall Street Journal op-ed piece,” Friedman observed, “Judy Shelton started her concluding paragraph: ‘Until the US begins standing up once more for stable exchange rates as the starting point for free trade …’” Stopping there, Friedman noted that, “It would be hard to pack more error into so few words.”

“A system of pegged exchange rates, such as the original [International Monetary Fund] system or the European Monetary System,” Friedman went on to explain, “is an enemy to free trade. It is no accident that the 1992 collapse of the EMS coincided with the agreement to remove controls on the movement of capital.” In Friedman’s view, the idea that monetary policymakers should turn away from the internal balance and focus instead on preventing market-driven exchange-rate movements was a recipe for disaster. Such an approach would require all economies to abandon free trade and return to managed trade, thereby beggaring not just their neighbours but also themselves.

More than two decades later, Shelton’s views are no less erroneous or incoherent. Her arguments about monetary policy do not follow any consistent thread, because she is merely a political weathervane, pointing in whatever direction is most convenient for securing her next job.

Last year, she warned that the Fed should be careful not to do anything to curb stock prices, telling CNBC, “More than half of American households are invested through mutual funds or pension funds in this market. I don’t want the Fed to pull the rug out from under them.” And yet, in 2016, when unemployment was higher and the case for easy money stronger, she chastised the Fed for “appeasing financial markets” with loose monetary policies. Given this volte-face, it is not unreasonable to conclude that Shelton’s support for monetary-policy easing depends not on economic fundamentals but on who is in the White House.

Similarly, back in 2011, when there were lots of unemployed Americans who could be put to work producing exports, Shelton argued against policies that would weaken the dollar. “Let’s not compromise our currency in a misguided attempt to boost US job growth,” she advised in a commentary for the Wall Street Journal. “America’s best future is forged through sound finances and sound money.”

But nowadays, the same person who wrote those words sees compromising the currency as an added bonus from the interest-rate cuts she wants the Fed to pursue in response to monetary-policy loosening by the European Central Bank. In fact, she now believes that US monetary policy should be eased “as expeditiously as possible”. Never mind her warning in 2009 that “loose monetary policy … leads to internal bankruptcy … whole nations have foundered on this path.”

Given this history of flimflam, Catherine Rampell of The Washington Post was absolutely correct earlier this month when she called Shelton “an opportunist and a quack”. Rampell also notes that, “Senate Republicans seem to know this”, even if they “still may be too craven to oppose her nomination, for fear of crossing Trump”.

For example, Kevin Cramer of North Dakota has said that while he likes the idea of having someone on the Fed Board who will challenge the status quo, he “wouldn’t want five members like [Shelton]”. More worryingly, Thom Tillis of North Carolina apparently does not think that Shelton’s bizarre advocacy of the gold standard matters, because that issue is already off the table. Tim Scott of South Carolina agrees, arguing that Shelton’s past “controversial statements” are “not relevant”.

Putting on a slightly braver face, Pat Toomey of Pennsylvania told Shelton at her confirmation hearing that he is worried about her recent statements in support of devaluing the dollar. “We don’t get to control other countries’ monetary behaviour,” Toomey warned. “I think that is a very, very dangerous path to go down.” Likewise, Richard Shelby of Alabama has indicated that he is “troubled by some of [Shelton’s] writings”, and John Kennedy of Louisiana admits that, “Nobody wants anybody on the Federal Reserve that has a fatal attraction to nutty ideas.”

Nonetheless, the Wall Street Journal editorial board has decided to defend Shelton’s nomination, particularly her belief that “monetary policies that ignore exchange-rate stability wreak political and economic havoc.” In effect, it is choosing her error-packed words over Friedman’s commonsense arguments about the proper goals of monetary policymaking.

Trump, of course, wants Shelton on the Fed Board so that he can threaten Fed Chair Jerome Powell by holding her out as a ready replacement. If we have learned anything over the past three years, it is that congressional Republicans’ furrowed brows and rhetoric of “concern” are worthless. Kennedy, after expressing his reservations about “nutty ideas”, went on to stipulate that, “I’m not saying that’s the case here.” And Mike Crapo of Idaho has gone so far as to praise Shelton for her “deep knowledge of democracy, economic theory and monetary policy”.

If Republican senators are going to save the country from yet another Trump misstep, they will need to find their long-lost spines. I’m not holding my breath.

J. Bradford DeLong is professor of Economics at the University of California at Berkeley and a research associate at the National Bureau of Economic Research. He was deputy assistant US Treasury secretary during the Clinton administration, where he was heavily involved in budget and trade negotiations. His role in designing the bailout of Mexico during the 1994 peso crisis placed him at the forefront of Latin America’s transformation into a region of open economies, and cemented his stature as a leading voice in economic-policy debates. ©Project Syndicate, 2020.
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