The Federal Reserve and its chairman, Ben Bernanke, should not be allowed to get away with what they did on Wednesday.
What they did at the end of their Open Market Committee meeting was to essentially throw up their hands in the face of their legal responsibility to create a full-employment economy in a way that keeps inflation in check.
It is often forgotten that the Fed has a legal mandate to take the necessary monetary steps to encourage job creation. It’s called the Full Employment and Balanced Growth Act, otherwise known as the Humphrey-Hawkins bill. (However, conservatives haven’t forgotten it, and they regularly call for the law’s repeal.) The bill sets “as a national goal the fulfillment of the right to full opportunities for useful paid employment at fair rates of compensation of all individuals able, willing, and seeking to work.”
The law does not tell the Fed how to ensure “the fulfillment of the right” to “useful paid employment,” but the intent is unambiguous: When the nation is in a period of high unemployment, the Fed has a responsibility to act.
To be fair, the law itself shares the responsibility for full employment with the executive branch and Congress. And in responding to today’s employment crisis, Congress has also been derelict—and conservatives to a degree that is nothing short of criminal.
In fact, one of the positives that came out of Bernanke’s public statements Wednesday was his warning that the federal budget cuts that Republicans are trying to force as a condition for increasing the nation’s debt limit would hurt growth, thus making the nation’s unemployment situation worse. Here’s how he was quoted in The Huffington Post, “I don’t think that sharp immediate cuts in the deficit would create more jobs … I think what people will understand — should understand — is that our budgetary problems are very long-run in nature.”
His warning appeared to have no effect, however, as House Majority Leader Eric Cantor withdrew from negotiations with Vice President Joe Biden on increasing the debt limit because Democrats won’t rule out tax increases, even though what Democrats mainly are proposing is ending tax breaks on corporations and the wealthy.
But Bernanke is being properly taken to task for leading a Fed that, while it has limited tools in its arsenal in the face of an obstructionist conservative bloc in Congress, appears to be acquiescing to that bloc rather than defying it, as the law clearly gives it space to. Ryan Avent had this to say in The Economist:
There’s no real mystery behind the slow improvement in employment; it flows directly from the lacklustre growth in the economy. The Fed projects that the economy will expand at less than 3% for 2011 as a whole; growth was revised downward for 2011, 2012 and 2013. It should be noted once again that rapid labour market recoveries are associated with periods of rapid, above-trend growth. If you don’t have the latter, you don’t get the former.
Now, the Fed’s projected growth rates are for real GDP expansion. And it’s possible that slow real output growth is entirely due to real factors. It could be the case that if the Fed attempted to push the economy to go any faster, accelerating inflation would result. The Fed doesn’t actually seem to believe this … But maybe the Fed has changed its mind. I can’t say. I can say this: the Fed can’t control real factors, but it can control nominal ones. And right now, it appears that nominal output growth in 2011 will fall short of the economy’s long-term trend. … I don’t expect the Fed to work miracles. There are lots of economic problems Ben Bernanke can’t solve. I do expect the Fed to do its job, and right now it looks like the Fed is saying it has no responsibility for meeting its nominal goals. That’s not acceptable.
Daniel Indiviglio at The Atlantic, meanwhile, took issue with the statement from the Fed that “the unemployment rate remains elevated; however, the Committee expects the pace of recovery to pick up over coming quarters and the unemployment rate to resume its gradual decline toward levels that the Committee judges to be consistent with its dual mandate.”
“This is a strange thing for the Fed to say,” Indiviglio writes. “The pace of the recovery will pick up in coming quarters — okay maybe, but the point is that currently unemployment is no where near consistent with its dual mandate. The unemployment rate is 9.1%, and underemployment is much more severe. Even if hiring does reach levels consistent with what we saw in February through April, full employment will not be restored for a very, very long time. Fed chieftains can’t honestly believe that this rate of job growth is consistent with its dual mandate.”
Millions of unemployed people, and the millions more who are concerned about the damage long-term unemployment is doing to the economy and the nation, know that we must expect more of both the Fed and our elected officials on Pennsylvania Avenue. We know that the forced march to austerity, with its tolerance of elevated levels of unemployment for the remainder of the decade, is a dereliction of duty and a recipe for economic ruin. We must continue to demand a change of course toward a policy of full employment.