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‘Dual mandate’ trap

George Will

WASHINGTON

This lame-duck Congress — its mandate exhausted, many of its members repudiated — should merely fund the government for a few months at current spending levels with a “continuing resolution,” then apologize for almost everything else it has done and depart. If, however, the 111th Congress wants to make amends, it should repeal something the 95th did.

The Humphrey-Hawkins Full Employment Act of 1978 gave the Federal Reserve a “dual mandate.” Although the central bank is a creature of Congress, it is, in trying to fulfill this mandate, becoming a fourth branch of government.

The Fed’s large, and sufficient, original mission was to maintain price stability — to preserve the currency as a store of value. The Fed, however, had institutional imperialism thrust upon it when Congress directed the Fed “to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.” The last two goals are really one. In the pursuit of the first, which requires the Fed to attempt to manage short-term economic growth, the Fed has started printing $600 billion — this is the meaning of what is called, with calculated opacity, “quantitative easing.”

Those running the Fed, says Rep. Paul Ryan, R-Wis., dryly, “are really putting the fiat in fiat money” — money backed by nothing but trust in the judgment and good faith of the government creating it. The Fed is doing what the executive branch wants done but that the legislative branch will not do — another stimulus.

By seeming to do the president’s bidding, the Fed stumbled into a diplomatic thicket. While the president was impotently accusing China of keeping the value of its currency low in order to facilitate exports, many nations were construing America’s quantitative easing as similarly motivated currency manipulation. The primary purpose of quantitative easing might be to force down the yields of government bonds in order to induce investors to invest in corporate bonds and stocks. But when a predictable result of the policy is to devalue the dollar, it is a pointless parsing of words for Treasury Secretary Timothy Geithner, who serves a president who has vowed to double U.S. exports in five years, to say that America will never weaken its currency “as a tool to gain competitive advantage.”

In a 2007 speech, Frederic S. Mishkin, then of the Fed’s Board of Governors, lauded the dual mandate as “consistent with” the Fed’s “ultimate purpose of fostering economic prosperity and social welfare.” Note how easily the mandate to “maximize employment” becomes the grandiose, and political, function of promoting “social welfare.”

The Fed cannot perform such a fundamentally political function and forever remain insulated from politics. Only repeal of the dual mandate can rescue the Fed from the ruinous role as the savior of the economy, or of any distressed sector (e.g., housing) that clamors for lower interest rates. Ryan has introduced repeal legislation before and will do so again in January.

Ryan, incoming chairman of the House Budget Committee, says the Fed thinks it can adroitly “put the cruise missile through the goal posts.” But how adroit can Fed management of the economy be• No complex economy can be both managed and efficient, meaning dynamic. To think otherwise is what Friedrich Hayek called “the fatal conceit.” That conceit can be fatal to the Fed’s independence.


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