Mercy for the Fed
This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.
It’s not often that this newspaper calls for mercy for the Fed. But this morning the Nobel laureate Joseph Stiglitz is devoting his column on inequality to endorsing Governor Yellen, currently the vice chairman, as the next chairman of the Federal Reserve. It’s one of a raft of pieces endorsing Mrs. Yellen that have appeared in the New York Times. But why, Mr. Stiglitz asks, “is this a matter for a column usually devoted to understanding the growing divide between rich and poor in the United States and around the world?” The answer, if he says so himself, is “simple.” It’s that “what the Fed does has as much to do with the growth of inequality as virtually anything else.”
Isn’t the Fed having enough problems with its dual mandates of price stability and full employment? Do we really want to stick the Fed with the task of bridging the divide between the rich and the poor? It would be unfair to blame this entirely on Professor Stiglitz. Only a few days earlier, the Times’s Washington correspondent, David Leonhardt, issued a column suggesting that “[t]he most obvious topic for a Democratic Fed leader to emphasize is the sharp growth in income inequality, which many scholars think has destabilized the economy.” We wrote about it in an editorial called “The Class-Backed Dollar,” calling the idea a “third mandate” for the central bank.
Professor Stiglitz calls for the new mandate without so much as a howdy-do to an earlier generation of the Times. The fact is that when the employment mandate was laid on the Fed — via the Humphrey Hawkins Full Employment Act, which was signed by President Carter in 1978 — the Times was against the measure. That was back in the Carter years, the last time the country was in the grip of a left-wing, Democratic presidency. The Times warned of the consequences of uncertainty and called for a rejection of the law, labeling it a “cruel hoax on the hard-core unemployed, holding before them the hope — but not the reality — of a job.”
Our own view is that it’s long past time to declare Humphrey-Hawkins a failure and to relieve the Fed of the assignment to boost employment. This isn’t the Fed’s fault. Alfred Nobel himself couldn’t have made Humphrey-Hawkins work. All the hectoring by the left-wing economists and pundits isn’t going to change that. Yet another mandate is the last thing the Fed needs as it marks its double jubilee. The right move is for the Congress to take a hard look at the Sound Dollar Act, which would repeal Humphrey Hawkins and diversify the board of the Fed to include the regional presidents (a route through which Mrs. Yellen rose).
Here’s the thing to remember. If the gap between the rich and the poor has been getting wider, it is a feature of the era of fiat money. This was commenced in the early 1970s, with the collapse of the gold-exchange standard that had obtained during the era of Bretton Woods. It has led to two generations of hedging and speculation that is, under the circumstances, natural and even admirable, but has only exacerbated the inequalities about which the Times complains so much. A sound currency would be the best way to regulate the banks and the government. The centennial of the Fed is as good a moment as any to start this reform, so that whoever is named chairman or chairwoman of the Fed will have a mandate that is clear.