November 21, 2010
The lead Washington Post editorial told readers that:
“Yet buying hundreds of billions of dollars worth of federal debt in a deliberate effort to lower long-term interest rates and boost employment looks to many economists, market participants and politicians like fiscal policy by another name.”
Huh? How does pushing interest rates down to boost employment look like fiscal policy? Isn’t that pretty close to the textbook definition of monetary policy? Back when I was learning economics, fiscal policy was when the government directly spent money or gave tax cuts, it wasn’t about making it cheaper for the private sector to borrow.
The editorial is also troubling by seeming to suggest that the Fed should no longer have a mandate to pursue full employment.
“Still, the Fed is nearly unique among central banks in the developed world in having responsibility to maximize both price stability and employment. The fact that the left can attack him for not pursuing full employment aggressively enough, while the right can accuse him of pursuing it at the risk of hyperinflation, suggests that the dual mandate piles a heavy political burden on what is and should be a nonpolitical institution.”
The Post is apparently upset that Chairman Bernanke and the Fed are attracting criticism. Sure no one likes to be criticized, but why would anyone think that this is a problem? From the standpoint of an economist this boils down to the question of whether all the nasty comments directed at Bernanke are causing us to have trouble getting people to serve at the Fed. That doesn’t seem to be an issue at the moment, so there is no obvious reason that criticisms of the Fed chair should bother us.
The other flaw in the Post’s logic is the utterly crazy idea that taking away the Fed’s mandate to pursue full employment is somehow non-political. Monetary policy has enormous impact on the level and distribution of income in society. If the Fed has a green light to ignore high levels of unemployment and it takes advantage of this option, then it will be potentially costing the country trillions of dollars of lost output.
Furthermore, since the incomes of middle and lower income workers are most sensitive to the rate of unemployment, the bulk of these losses would be endured by those at the middle and bottom of the income distribution. The negative hit to the incomes of those at the middle and bottom due to high unemployment dwarfs everything that Congress ever debates in terms of TANF, EITC, UI and just about any other tax and transfer program. It is hard to understand why anyone who believes in democracy would want to put such a central economic decision (the trade off between the unemployment rate and the risk of inflation) outside of the scope of political action.
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