By: Christopher Hanks
Christopher Hanks is a mathematician and defense analyst. In his work at defense think tanks over the last 30 years, he has focused on logistics processes and models, revolving-fund operations and business reform efforts.
Triggered by the current
economic difficulties, a debate is now raging about whether the Government
Accountability Office (GAO) should audit Federal Reserve operations. The issue
is whether GAO audits would compromise the Fed’s independence in setting and
implementing monetary policy.
The Fed’s monetary-policy decisions influence the supply and flow of money in the economy. Usually the Fed is able to implement its decisions by taking actions—for example, adjusting interest rates and dictating capital-reserve levels—generally regarded as routine, even if they are not always popular. Sometimes however, as the economic developments over the two years have shown, the Fed finds itself taking highly non-routine actions—making large emergency loans to major financial institutions, for one—in order to prevent a total collapse of the economic system. As a result of actions the Fed has taken of the latter type, legislation is now making its way through Congress calling for the Fed to be audited by the GAO.
In order to decide whether GAO audits would compromise the Fed’s independence, it is first necessary to be clear about exactly what happens when the GAO “audits” a government agency. The GAO’s own website provides a commendably clear description:
“Our Work is done at the request of congressional committees or
subcommittees or is mandated by public laws or committee reports. We also undertake
research under the authority of the Comptroller General. We support
congressional oversight by
· auditing agency operations to determine whether
federal funds are being spent efficiently and effectively;
· investigating allegations of illegal and improper
activities;
· reporting on how well government programs and
policies are meeting their objectives;
· performing policy analyses and outlining options for
congressional consideration; and
· issuing legal decisions and opinions, such as bid
protest rulings and reports on agency rules.
We advise Congress and
the heads of executive agencies about ways to make government more efficient,
effective, ethical, equitable and responsive.
Our work leads to laws
and acts that improve government operations, saving the government and taxpayers billions of dollars.”
Bullets one and three in above description make it clear that when GAO “audits” an agency’s operations, what it actually does are program evaluations —that is, investigations aimed at determining whether agency policies and programs are “meeting their objectives” and spending federal funds “efficiently and effectively” toward that end.
Actual financial audits, as opposed to program evaluations, did once represent the core of GAO’s work, but those days are long gone. Over the last 50 years a succession of Comptroller Generals (Elmer Staats, Charles Bowsher and David Walker )—all acting with the support of the Congress—have converted the GAO into something much more akin to a management-consulting agency rather than an accounting organization.
Indeed, as 40-year GAO veteran and director of GAO’s Office of Quality and Continuous Improvement Michael Motley noted in 2008: “At one time, GAO was mostly concerned with finances, but today only 7 percent of our work is solely financial.”
The fourth bullet in GAO’s work description above, however, is the one most critical for the current debate. As that bullet states, when GAO “audits” government agencies, it will do its own policy analysis and it will then make recommendations (“outline options”) to Congress about what needs to be done.
In other words, once it begins auditing the Fed, the GAO can be expected to begin making its own recommendations to the Congress—based on its own analysis, not the Fed’s—about what the Fed should have done (or should not have done, or should be doing) with regard to monetary-policy decisions and actions. If the Congress then enacts the GAO’s recommendations into law—as it has shown a ready willingness to do (some relevant examples are: the FMFIA of 1982, the CFO Act of 1990, the GMRA of 1994, and the FFMIA of 1996)—control of monetary policy will have passed from the Federal Reserve to the Congress.
Given the Congress’ oft-demonstrated inability to take a disciplined approach to financial matters, that would be a disaster.