The Fed’s Cost Overruns – OpEd


“Fed Remodel Keeps Inflating” by Andrew Ackerman and Nick Timiraos (Wall Street Journal, March 6, 2023, p. A1) reports that the cost of renovating the Federal Reserve System’s Great Depression-era headquarters building now stands at $2.5 billion. Beset by runups in the costs of building materials, predictable construction delays, and design changes demanded of architects along the way, the final price tag likely will be much higher.

The Fed is not an ordinary buyer of renovation and remodeling services. Because of its unique funding mechanism, Fed officials have weaker incentives to control costs than any other governmental bureau. Its annual budget is not appropriated by Congress but is instead determined by the central bank itself. The Fed generates income from a variety of sources, including interest on the portfolio of U.S. Treasury securities and other assets held on its balance sheet, various fees collected from member banks, gains (or losses) on foreign exchange transactions, and seigniorage on fiat currency issues. Any income remaining after paying employees and covering its own operating expenses is then turned over to the Treasury.

Fed officials thus exercise considerable discretion over the central bank’s business costs, which is to pursue what Milton Friedman called the “Holy Trinity” of stable prices, full employment, and economic growth. In so doing, Boris Pesek and Thomas Saving once observed that “even a moron who gets the right to print government currency (Federal Reserve notes) and sell it for income-earning assets … is bound to show a profit.” Those profits, unsurprisingly, are plowed back into the Fed itself and “expensed” on its balance sheet as amenities (lavish office spaces, thick carpets) for the benefit of the central bank’s employees.

A particularly apt example of what economists call “expense preferencing” is reported in the Journal’s March 6 issue: “The boardroom where the Fed’s rate-setting committee meets has a special tap with still, sparkling or chilled water, and the basement holds artwork from the Fed’s private collection by Andy Warhol and Alexander Calder.”

When the late Robert Tollison and I were working on a study of bureaucratic behavior at the Fed, which eventually was published in the American Economic Review (June 1983), our colleague Gordon Tullock remarked that for many years the cost per square foot of the “old” building housing the Federal Reserve System’s offices on Constitution Avenue was higher than that of any other Washington, D.C. governmental headquarters.

Plus ça change, plus c’est la même chose.

This article was published by The Beacon

William F. Shughart II

William F. Shughart II is Research Director and Senior Fellow at The Independent Institute, the J. Fish Smith Professor in Public Choice in the Jon M. Huntsman School of Business at Utah State University, and past President of the Southern Economic Association. A former economist at the Federal Trade Commission, Professor Shughart received his Ph.D. in economics from Texas A & M University, and he has taught at George Mason University, Clemson University, University of Mississippi, and the University of Arizona.

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