Republicans raid the Federal Reserve

https://www.washingtonpost.com/opinions/republicans-raid-the-federal-reserve/2015/11/06/f7dcec06-84b3-11e5-a7ca-6ab6ec20f839_story.html

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MEMBERS OF the House are patting themselves on the back for passing a $325 billion, six-year transportation bill, on a bipartisan basis. “This has been a great week in the people’s House,” new Speaker Paul D. Ryan (R-Wis.) crowed. The long-overdue bill would indeed provide much-needed stability to federally supported infrastructure upgrades around the country. And the process that produced it was relatively open, with members free to submit and vote on more than 100 amendments, as Mr. Ryan had promised.

In a crucial sense, though, this bill both epitomizes the United States’ democratic dysfunction and worsens it a bit, if such a thing is possible. Transportation traditionally has been funded by the federal gas excise tax, on the sound reasoning that people who drive on highways should help build and maintain them. Yet this tax, stuck at 18.4 cents per gallon since 1993, no longer raises sufficient revenue. And for political reasons the House leadership ruled out an increase — blocking Democrats from even bringing the issue to a vote on the new, more open House floor.

Instead, the six-year bill cobbles together financing from expedients: one-time strategic petroleum sales; ostensibly improved tax compliance; and, most dubiously, a raid on the Federal Reserve’s capital. The Fed returns the vast majority of earnings on its portfolio (swollen by recession-fighting expansive monetary policy) to the treasury. But it retains some each year, matched by payments from banks, as a buffer against losses. The practice strengthens the Federal Reserve’s balance sheet and thus increases public confidence in its ability to weather a crisis, albeit marginally. It is part of what makes the Fed a credible, independent central bank.

Yet the House bill would undermine this long-standing, conservative practice, a version of which other major central banks around the world also follow, by taking $29.3 billion that the Fed has socked away — and forbidding the bank from replenishing it. Note that the maneuver does not generate new financial resources, as taxes or offsetting spending would have done. Rather, it takes money out of one government pocket — the Fed — and puts it into another — the highway program. This is an offset only in the artificial world of budget “scoring.”

The Senate version of the transportation bill, by contrast, would raise money by cutting a 6 percent dividend the Fed pays banks for their contributions to its capital. That is a debatable policy; smaller banks would suffer if they no longer got what many regard as a sweetheart deal. But at least it affects a flow of real resources between banks and the federal government. That’s why the banking lobby prevailed upon House Republicans to raid the Fed’s capital instead in their bill.

Central bank independence and fiscal transparency are attributes of a healthy democracy and have been throughout history. Many a banana republic, by contrast, has come to grief using its central bank to facilitate government deficit spending. Post-World War I Germany had a similar problem, if memory serves. We’re not saying that the highway bill creates a precise analogy between the United States and those sorry examples — or even a close one. We just wish we could say that there’s no analogy whatsoever.