The debate on the monetary policy response to curb spiraling inflation has focused primarily on the role of the Federal Reserve. The role of the president in the factors that contributed to the recent bout of inflation has been largely overlooked, according to Wharton professor of legal studies and business ethics Christina Parajon Skinner.

In a recent paper titled “The Monetary Executive,” she wrote that the president has “far more influence over money in the economy — and levers for ‘fiscal dominance’ — than the Constitution arguably allows, casting a long shadow over the Federal Reserve’s ability to properly rein in inflation.” According to her, those powers could potentially be used to further political agendas and to unfairly disadvantage sections of the economy. Among the remedies she suggested are Congressional actions to scale down those presidential powers or limit those granted in emergency, a more assertive Fed, and a more vigilant public.

“Economists, and in particular, monetarists tend to believe that inflation is fundamentally a problem that results from a rapid increase in the money supply, suggesting that the cause lies with the Fed and failing to curb the rate of growth of the money supply through its traditional monetary policy tools,” Skinner said in a recent interview on the Wharton Business Daily radio show on SiriusXM. “That view implicitly presumes that the Fed is making decisions in a world of perfect central bank independence.” In other words, that view presumes that the Fed’s decisions about money supply and how to use its interest-rate and balance-sheet tools are not guided by “a president’s desire to have a hotter economy, which is to say easier money or more government spending,” she explained.

How Fiscal Dominance Works

With increasing presidential influence over monetary policy, inflation is no longer just a monetary phenomenon, Skinner said. “Fiscal dominance” becomes a risk if and as the Fed’s policies cater to “the fiscal prerogatives of the president,” she noted. “The most straightforward and drastic example of fiscal dominance — and the reason why we want to think about the presidency here — is debt monetization.”

“The Framers of the Constitution wanted to avoid concentration of power that could lead to tyranny.”— Christina Parajon Skinner

Skinner explained that fiscal dominance occurs when the federal government wants to increase spending and it needs to issue more debt — like government bonds — to do that. “In order to absorb that rapid increase in debt or keep the terms of financing that debt favorable to the government, the Fed increases open market operations to buy the debt or otherwise manages interest rates to accommodate the government. And we know this leads to inflation.” The last “serious period of debt financing” was in World War II, which was followed by inflation, and more recently in 2020, with inflation spiking in the aftermath, she added.

Skinner said her paper essentially offered “a little bit of a political-economy gloss on traditional monetarist thinking.” While inflation is certainly caused by a rapid increase in money supply, “we also need to look at the president’s role in perpetuating or instigating this rapid increase in the money supply by pushing for larger fiscal programs when we are already, and have been for a long time, in a state of deficit spending,” she added.

“The Framers of the Constitution wanted to avoid concentration of power that could lead to tyranny,” Skinner said. They allocated monetary power to Congress — this includes the power to decide whether to create money and regulate its value, and the power to direct spending. That way, the Framers aimed to ensure that the government would be accountable to the people for how it spent public funds — both taxes government collected and the debt it raised. “The Framers knew very well the dangers of giving the president power over money and the fisc. They were worried about a president who might one day want to become a king,” she noted. They wanted to ensure “that presidents didn’t have unilateral access to funds to wage wars of conquest or to otherwise control citizens;” or have powers “that could degrade the quality of money by issuing it at will and then manipulating its value as despots in history had done.”

A Radical Shift

In her paper, Skinner tracked the history of how successive congressional actions enabled the accumulation of those powers with the president. Although the Framers put in place the separation of powers over monetary policy, the first big “radical shift” occurred in the New Deal Era (1933–1939) when President Roosevelt asked Congress for a suite of emergency powers over the economy and the financial system in order to deal with the economic emergency of the Great Depression, Skinner recalled. Congress complied, and the president secured a range of powers including the authorization to confiscate gold (held as private property) and to “directly inflate the money supply” by forcing the central bank to buy Treasury bonds, or print more money if the president so chose. She described that phase as “a dramatic shift under the heading of emergency.”

There really has been no turning back since that shift that occurred in the New Deal Era, Skinner contended. “The public has come to accept that the president can do things in the name of economic emergency that only Congress was originally supposed to do. I’m not talking about presidents usurping power. It’s really Congress delegating it away in statutes.”

“Experts are increasingly worried about the return of ‘fiscal dominance,’ whereby the fiscal prerogatives of government have the upper hand in a central bank’s decisions.”— Christina Parajon Skinner

Those delegations of power to the president have created “a constitutional oxymoron: a Monetary Executive,” Skinner wrote in her paper. “Inasmuch as our system of government was designed to guard against a Monetary Executive, this aspect of separated powers has become eroded in the past ninety years.”

Although the Fed is vested with the responsibility for maintaining stable prices, “the line between what is ‘monetary’ and what is ‘fiscal’ has blurred increasingly since 2008, so too have the roles of Congress and the president, versus the Fed, in contributing to inflation,” Skinner wrote in her paper. That situation has given cause for alarm. She noted that “experts are increasingly worried about the return of ‘fiscal dominance,’ whereby the fiscal prerogatives of government have the upper hand in a central bank’s decisions.”

Skinner noted in her paper that in the past few years, “federal spending has skyrocketed, and the deficit [has] ballooned, coinciding with inflation and a wobbling central bank.” Much of that resulted from the pandemic and the economic emergency that ensued, she added. “In 2020, Congress enacted three massive COVID relief packages — totaling $3.4 trillion across four pieces of legislation, including $1.8 trillion in so-called ‘helicopter drops’ of direct aid to businesses and households. The fiscal stimulus was the largest in U.S. history and increased the federal debt by a whopping 30%.”

The COVID stimulus programs relied on monetary policy for support, where the Fed engaged in “an unprecedented bond-buying program,” nearly doubling its balance sheet size between February 2020 and March 2022 with $4.4 trillion of government bonds, Skinner said. “This ‘coordinated’ work of the Treasury and the Fed has prompted renewed attention to the possible influence of fiscal programs on monetary policy decisions and, in turn, inflation. There is a fine line indeed between the ‘coordination’ of monetary and fiscal policy and fiscal ‘dominance’ — the latter is a well-known recipe for inflation.”

Skinner wrote in her paper that “the specter of fiscal dominance is surely back” and it may thrive because of shifting attitudes around macroeconomics. “There is now the popular view that ‘deficits don’t matter’ for inflation,” the paper noted. “The ideas behind the so-called ‘Modern Monetary Theory,’ which now permeate public discourse, are grounded in the notion that a government can ‘print money’ to fund exorbitant deficit spending with no repercussions.’”

Skinner said in her paper that the MMT ideology is “evidenced by the government’s newfound penchant for high deficit spending — often presidentially led.” Under President Trump, the national debt nearly doubled, she noted. She also flagged President Biden’s program to cancel student debt. The Penn Wharton Budget Model estimated that the program would cost between $600 billion and more than $1 trillion over the next decade, depending on how it influences changes in students’ borrowing behavior.

“I’m not claiming that the Fed has succumbed to fiscal dominance, but I’m saying that 2020 … should be taken as a warning shot across the bow.”— Christina Parajon Skinner

Lessons to Learn

Skinner clarified that she is not suggesting that we are already seeing the worst of that phenomenon. “I’m not claiming that the Fed has succumbed to fiscal dominance, but I’m saying that 2020 [and the spending programs in the wake of COVID] should be taken as a warning shot across the bow,” she said. “We’ve seen the conditions for fiscal dominance to reemerge — an administration that believes in deficit spending and a crisis that provides overt justification for dramatic increases in the money supply under the heading of economic relief. While the Fed is still the captain of its own ship, this is good motivation for us to unpack the influence of the presidency on monetary affairs.”

Skinner highlighted two critical pieces of corrective action that could rein in unbridled presidential influence over monetary policy. One is for Congress to exercise “effective oversight of the Fed to make sure it is not responding to executive pressure.” The second is for Congress to avoid “further devolution of power to the presidency” in ways that allow political parties to justify greater influence over monetary policy that leads to repeated bouts of inflation.

Specifically, Skinner recommended changes to Fed policy. She called upon “Congress to enforce limits on the Fed’s ability to pay interest on reserves as a bulwark against future presidential pressure to monetize deficit spending.” She also suggested that the Fed move back to “a quasi-rules-based regime as another defense against a Monetary Executive.” Congress could also check “the presidential use of delegation grounded in an economic emergency,” she added.

She wrote that it is time for a more broad-based pushback against presidential influence over monetary policy. “It is crucial for the public, policymakers, and the legal academy to pause and reflect upon whether we are satisfied with our new silent monetary constitution, where the president looms larger than Congress, and whether this mode of governance can be sustained as legitimate over time.”