The Monetary Industrial Complex

It sounds almost like a conspiracy theory when you read. It is pretty scary stuff, very shady. It is work on the Monetary Industrial Complex. I am not going to claim expertize in this matter but it is something that i found very interesting and thought should get more publicity. The core of this theory is that the Federal Reserve works towards reelecting Republicans. Pretty crazy right? Well maybe not as crazy as you might have thought. Maybe the Federal Reserve is acting playing politics in a way we have not suspected.

The inspiration for this piece comes from a Kevin Drum Blog Entry at Political Animal. It starts off from a review of the new Larry Bartels book Unequal Democracy: The Political Economy of the New Gilded Age. The book is geared towards illustrating that Democrats are far superior to Republicans when it comes to economic matters. Democrats have long been the party of domestic policy in the minds of voters and Bartels makes the case that there is good reason for this. Democratic Presidents do better. Read here and here.

The results are simple: Democratic presidents have consistently higher economic growth and consistently lower unemployment than Republican presidents. If you add in a time lag, you get the same result. If you eliminate the best and worst presidents, you get the same result. If you take a look at other economic indicators, you get the same result. There's just no way around it: Democratic administrations are better for the economy than Republican administrations.

Democrats improve the standards for everyone and the Republicans only for the rich. This is very evident in the Bush administration as the wealthiest have prospered while everyone else stagnates. Why, if the Dems are vastly better for everyone economically do Republicans get elected? You have to read Bartels book to get his full explanation but the succinct one boils down to

– Voters tend to behave only as if election year economic performance matters, not performance across the entirety of a term.

– Fundraising impacts election outcomes in a way that puts a thumb on the scales for politicians with pro-rich-people policies.

– Voters have trouble fully understanding the choices in front of them.

The second two of these contributing factors will not be shocking to anyone who follows politics at all. Low information voting and the power of the wealthiest people when it comes to politics are well documented and commonly remarked upon. What is not so commonly talked about and what should catch peoples attention is the first factor,

– Voters tend to behave only as if election year economic performance matters, not performance across the entirety of a term.

What happens in an election year is that the Republican Presidents outperform Democratic ones. This effect is well documented.



If in election years people vote their pocket book then it is not a great mystery why dems lose. Election years are not good in terms of the democrats economic productivity. What happens then in an election year that turns things around for the Republicans? The answer some have suggested is that the Fed is helping them out.

The Fed is helping out the Republicans during election years through manipulation of interest rates. The paper linked to is written by James K. Galbraith, Olivier Giovannoni, Ann J. Russo of the University of Texas Inequality Project at the Lyndon B. Johnson School of Public Affairs. They contend that the Federal Reserve is helping to reelect the Republicans by engaging in monetary policy designed to give short term boosts to the economy during the election cycle.

The hypothesis [] has two independent parts. On one side, it predicts that...monetary policy [is] more permissive in years when a Republican administration is seeking renewal, than when it is not. On the other side, the hypothesis predicts that...monetary policy [is] more restrictive, after controlling for the influences of inflation and unemployment, in years when a Democratic administration is seeking renewal.

....The results in Table 3 give striking confirmation to the most cynical historians of the 1970s. They show that, controlling for the impetus of inflation and unemployment, the Federal Reserve systematically intervened in election years [during the period 1969-1983]. Both variables are independently significant, of opposite sign, and together they suggest a habitual ceteris paribus differential in the term structure of between 200 and 300 basis points, favoring Republicans.

....Table 4 gives information on the modern period....Over the years 1984 to 2006, monetary policy moves strongly in favor of Republicans and (less strongly) against Democrats in election years.

I cant pretend to fully understand the paper since i don't have a PhD. in stats or economics. If anyone out there reads it and finds it to be completely without merit feel free to comment. There hypotheses does seem to fit the Baretls data set though. Something happens in Republican election years that does not happen in Democratic ones. Of course it is entirely possible that there is some confounding variable that explains the difference in attitude from Admin to Admin. The authors provide a time line

We have previously noted that periods of a steep term structure, reflecting low short-term interest rates relative to inflation expectations and therefore a stimulative monetary policy stance, are not randomly distributed but instead strongly persistent over long periods in our sample. There are five such periods:

1975II – 1977II: All under the Ford administration, ending as Carter takes office.

1982III – 1985IV: All in the Reagan administration, ending a year after his reelection.

1987II – 1988II: Again under Reagan, starting before the stock market crash, and preceding the election of GHW Bush.

1991II – 1994IV: Beginning under GHW Bush, ending under Clinton.

2001IV – 2004III: Beginning with 9/11, continuing through the reelection campaign of GW Bush.

If you believe the paper then the logical follow up question is why? Why is the fed working towards the election of Republicans? The obvious speculation is considered in the paper. Namely that although the Federal Reserve is formally independent of the executive branch, the President does appoint the chair and members of the Board of Governors, who in turn control the presidencies of the regional Federal Reserve Banks. Three Federal Reserve Chairman (Burns, Greenspan, Bernanke) have held prior high office in Republican administrations.

It is not hard to believe that George W. Bush would be politicizing the Fed. However it becomes some what more difficult to believe when you extend the pattern all the way back to the Nixon Administration. This seems like the kind of thing someone would have mentioned or discussed before this point in time as the Fed is a central focus of many economists.

If it is true it is a pretty clever operation and something you could almost admire if it was not inherently wrong -- though i am not sure it is illegal. A systematic manipulation of the election cycle for the past 40 years? Hard to believe but there is some evidence. If any one has a great counter to this i am more than happy to hear it.