I just thought it might be appropriate to bring this Act off the mothballs and talk about it. It passed in 1977, and the intention of this law was to have more coordination among all government entities, inclusive of the Federal Reserve, in order to have more control over economic outcomes. The Great Inflation of the 1970s wasn’t just a monetary phenomenon. It was mostly that but there were other things going on at all levels of government that were counterproductive and unemployment became a nagging problem. It was truly a case of big government causing subpar economic outcomes. And just to give you an idea of the kind of unemployment plague we were facing at that time, the average was 7.8%.
Here’s the summary of the Act:
It starts off with the main purpose:
“An Act to translate into practical reality the right of all Americans who are able, willing, and seeking to work to full opportunity for useful paid employment at fair rates of compensation…”
Then it says what effect the government wants:
“…to assert the responsibility of the Federal Government to use all practicable programs and policies to promote full employment, production, and real income, balanced growth, adequate productivity growth, proper attention to national priorities, and reasonable price stability…”
And then it gives the obligation to the President to “set the explicit short-term and medium-term economic goals…” to achieve a better integration of general and structural economic policies and to improve coordination of economic policymaking within the Federal Government.
What that means is that the President gets to set economic goals and coordinate the efforts of the government to achieve those goals and the Fed needs to follow his/her lead.
This Act didn’t just add the full employment policy goal, like to just paste it in over existing mandates. It restated the entire purpose of the Fed. The Fed “shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” This restatement is consistent with the stated intent of the act.
I wanted to talk about the law because the persistence of the treading-water kind of economy has been eating at me, and I’ve been trying to sort out who is responsible for the mess. One take on it might be that Obama was for fiscal stimulus and made it clear to Bernanke that was how short-term economic recovery would be done. In that case, Bernanke isn’t responsible, and it is all on Obama.
On the other hand, however, the behavior of the Fed in maintaining a ceiling of 2% on the PCE (should be core, but there is speculation it is headline) with no floor would not allow fiscal stimulus to work. The Fed has to allow it to work by allowing higher than 2%, which is hasn’t done. And that leads me to believe that it is more likely that Bernanke has basically ignored Obama even though he has an obligation, according to the Full Employment and Balanced Growth Act, to cooperate.
Basically, the problem we have is that Bernanke was told how Obama wanted the goals to be met, and the Obama plan and Bernanke’s policy choice are not compatible. So, instead of dropping the one policy Bernanke has spent a great part of his career pursuing, he kept right on going with it, regardless of the law, and the Fed’s responsibility to maintain adequate liquidity to foster the intent of full employment and balanced growth.
Nothing in this Act, which was the last major overhaul and refocusing of governmental efforts on economic outcomes, points to a main purpose of the Fed as controlling inflation. In fact quite to the contrary. All one has to do is read the title of the Act to get an idea of where the Fed needs to be. It is stated in the summary in such a way as to imply that if there is a conflict of visions between the President and the Fed, the President wins. If Bernanke and his colleagues over at the Fed don’t want to cooperate they really should just step aside. No one is asking them to do things they don’t agree with, but the appropriate remedy for that problem is to resign instead of just carrying on with destructive policy and being guilty of gross abuse of power with disastrous results.