“Maintaining price stability is also essential for achieving the other element of the dual mandate, namely, maximum sustainable employment.” — Former Fed Governor Frederic S. Mishkin
“Under hierarchical mandates, price stability or low inflation is typically the principal objective, and other objectives can be pursued only once the inflation objective is met.” — Former Fed Governor Laurence H. Meyer
As usual, one of Twitter’s Top-Notch Contributors, @moorehn (aka the excellent editor of economics and finance for the Guardian US: Heidi N. Moore), shared a fascinating article yesterday that is truly a thought provoker. The article, “Quantitative Easing Isn’t Magic,” by James K. Galbraith features many interesting insights, all of which are worth considering. It is short and definitely worth the read.
I would like to address a few of the issues raised in the article, though I also hope to address some of the others in future writings, as they are all worthwhile and important discussions to have. Before I go into this particular discussion, I would like to reiterate that, just because I don’t necessarily agree with all of the author’s views, I DO agree unemployment is a crucial issue and should not be ignored. I merely believe that there are more efficient and, more importantly, more effective ways of solving the problem.
“Unlike a number of other central banks around the world, the Federal Reserve has a very explicit dual mandate, and frequently it’s portrayed as if there’s a conflict between the objectives of price stability and maximum employment.” — Former Minneapolis Fed Bank President Gary H. Stern
The single versus dual mandate issue, sometimes raised by Congresspeople, the Fed, the public, etc., is a challenging one. Unfortunately, the debate often becomes political, but this analysis is meant to be solely economic in nature with the goal being to discuss the optimal framework for monetary policy as part of a system that truly does lead to price stability and maximum sustainable employment. That being said, I understand that political issues are important to consider when crafting solutions for issues involving the federal government and related entities.
I have provided links to the quote sources above from the Fed, as well as from other articles, in order to provide as much information as possible so that folks can decide for themselves what they feel might be optimal. Onto the article…
“What we need instead, today, is a candid review of what central banks cannot do. Yes, they can usually forestall panic. Yes, for better or worse they can keep zombie banks alive. No, they cannot bring on economic recovery or solve any of our deeper economic problems, from unemployment and foreclosures in America to unemployment and economic collapse in Greece and elsewhere. The sooner we stop thinking of central bankers as wizards and magicians, the better.” – James K. Galbraith
I generally agree with the above paragraph from Dr. Galbraith’s article. There is a limit to what central banks can do, as discussed in one of my recent posts featuring comments from former Fed Chairman Paul Volcker. However, the author does not seem to necessarily feel the unemployment aspect of the mandate should be adjusted, despite seeming to agree that there is a limit to the Fed’s ability to help with unemployment. (“No, they cannot bring on economic recovery or solve any of our deeper economic problems, from unemployment and foreclosures in America to unemployment and economic collapse in Greece and elsewhere.”)
Again, from Dr. Galbraith’s article: “Changing to a price-stability objective would oblige Ben Bernanke, the Fed chairman, to claim, as ECB officials do, that he is motivated solely by his charter, even if obviously doing something else. And Congress, having imposed the price-stability straitjacket, would not be able to complain about unemployment, foreclosures or anything else. The Fed-Congress dialogue would be reduced to a tissue of ritual incantation and lies.”
As Governor Meyer highlights in his opening quote, the Fed could still focus on unemployment, but it would be after ensuring price stability. Price stability in the context of this discussion is likely focused on consumer price stability. As the Fed is not currently concerned about consumer price stability, it would appear that it could consider unemployment, even under a “single mandate.”
As Governor Meyer mentions in his speech linked to above, a “single” mandate is, more precisely, a “hierarchical” mandate with a primary focus on price stability. As Governor Mishkin points out in the above quote, ensuring price stability is a necessary prerequisite for ensuring maximum employment. Accordingly, it would appear to make sense for the Fed to focus first on price stability before considering unemployment in its policies.
Former Federal Reserve Open Market Committee Member and Dallas Fed Bank President Dr. Bob McTeer has commented (click on link below for a short discussion) that many members at the Fed don’t necessarily disagree with this sentiment: “Over the years, I believe the majority of Open Market Committee members favored a single mandate of price stability – not all, but probably a majority.” — Dr. McTeer
Dr. Galbraith’s views as to why the dual mandate is better than a hierarchical mandate for the Fed focus on important issues such as accountability. Dr. Meyer addressed this issue in his speech as well: “Accountability is facilitated by providing the central bank with a specific, external (usually legislatively imposed) mandate. Two aspects of designing the objectives for monetary policy are important. First, a single objective (typically price stability) — or even a hierarchical mandate — makes the central bank more accountable, because multiple objectives always carry trade-offs, at least in the short run, that are subject to discretion by the central bank. Second, explicit numerical targets make a central bank more accountable than more general targets. Specifically, an explicit numerical inflation target makes central banks more accountable than a more general commitment to price stability.”
Dr. Galbraith also addresses other issues that are surely important in a comprehensive analysis of monetary policy, such as asset-price increases stemming from expansionary monetary policy, but it would take another post to address them as well. (Like I mentioned, it is truly a thought-provoking piece!)
I would like to conclude by reiterating my agreement that the unemployment issue is an important one that should not be downplayed. As Governor Mishkin states in the speech cited above: “Now with respect to the first objective, the rationale for maximizing employment is fairly obvious. The alternative situation — high unemployment — is associated with human misery, including lower living standards and increases in poverty as well as social pathologies such as loss of self-esteem, a higher incidence of divorce, increased rates of violent crime, and even suicide.”
I applaud Dr. Galbraith for raising the issues he did, even if my research has led to the conclusion that it would be more efficient and effective to deal with the unemployment issue through fiscal policy adjustments by the Congress, such as tax reform and infrastructure spending.
I am confident the country can and will resolve the current problems in an efficient and effective manner in an effort to maintain and enhance our prosperity.
Jonathan Prober has specialized his academic and practical endeavors on the five pillars of professional services: finance, economics, financial accounting, taxation, and the law. His professional experience includes dealing with business and legal issues, including wealth management, financial valuation, and corporate strategy. For more, visit Prober’s Playbook or follow Jonathan on Twitter at @jonathanprober.