Debate Economics 104: The Federal Reserve

Daniel Luo | Jul 26, 2021
3 min read

The Opinions Expressed In This Blog Post Are Solely Those of the Author And Not Necessarily Those Of DebateDrills

This is part of an ongoing series of blog posts where I talk about Debate and Economics. In this issue, I discuss the Federal Reserve, monetary policy, and applications to argumentation.
   
There may be no government agency more misunderstood than the Federal Reserve (starting from the fact that it isn’t a government agency!) Its formal role, the “dual mandate” of inflation and unemployment, itself requires a solid semester of macroeconomic theory to even begin to understand. The basic tools that it both uses and can use to achieve its policy objectives are sufficiently technical that they are often relegated to upper-division undergraduate courses with nontrivial prerequisites. Yet, despite this surprising technicality, I think the core of monetary policy (especially its underlying intuition, and the “policy” portion) is relatively accessible and can be utilized with aplomb in debate, if done correctly.

What is the Federal Reserve?

The Federal Reserve (or Fed) is a collection of 12 central banks who together perform a few functions; they ship overnight loans to private banks (hence the name “bank”), set the interest rate, and perform some regulatory oversight to ensure that banks aren’t at risk of collapse. Most important of these broad functions is the second; the interest rate has great influence over GDP and productivity writ large. Lower interest rates generally encourage spending and investment, while higher ones freeze investment and lower consumption (resulting in savings becoming more attractive). The Fed votes quarterly (four times a year) on the direction of rates. The voting committee is called the FOMC, or the Fed Open Market Committee. Many of the governors are appointed by the President and approved by the Senate (unsurprisingly, the majority of Trump’s picks have been quite unqualified, with many withdrawing), while others are drawn from the Governors of the banks on a rotating basis.  

What can the Fed do?

Mostly, the Fed plays around with interest rates. While recent recessions have pushed this tool to the limit and caused the advent of a bunch of other cool monetary tools (quantitative easing, forward guidance, and yes – even “helicopter money”), the traditional way the Fed has influenced the economy is through setting interest rates. The process for doing this is quite technical and the effect isn’t precise – in fact, it is often called a “hammer.” However, it has, in general, worked in the past. The Fed also has great discretionary power over how much money gets issued and where to issue it, (in a sense, a “dollar” is just a byte on a computer owned by the Fed), so it can influence things like bank or consumer confidence, and even individual wealth.


What are some possible debate applications?

The structure of the Fed makes it somewhat interesting as a tool for disads and counterplans (and makes the legitimacy of counterplans interesting). I think there are two broad arguments that can be made that I’ll discuss, in decreasing degrees of quality.

The stimulus counterplan
Exactly what it sounds like. The Fed has enormous control over the money supply and this is, I think, an amazing counterplan for econ impacts when we are in recessionary gaps.

This serves an important function - helping to solve econ scenarios. If your opponent lacks a strong understanding of what would cause economic problems, you can capitalize on that.

The interest rates disad, and why it rarely makes sense
Barring Shelton’s confirmation to the Fed, this is one of the canonical disads that never made any sense to me. The underlying idea—that the 400+ PhD economists employed by the Federal Reserve would undertake a policy sufficiently destabilizing that would lead to wide-ranging economic collapse that high schoolers could predict seemed unlikely. Ultimately, as someone who fiercely believes in specialization, the idea that so many hyperintelligent people could make a move so fundamentally unintelligent seems to be almost surely impossible.

In sum, you never know when strong knowledge of the Fed will come in handy in debate! Particularly with the proliferation of econ impacts and econ debates, it can serve a useful function.

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