With Great Political Independence Comes Great Responsibility not to Mire the Country in Double-Digit Unemployment

Yesterday David Ignatius accused Chris Dodd of wanting to politicize the Federal Reserve’s control of monetary policy. Kevin Drum points out that Ignatius has this wrong. But it’s worth noting something deeper about Ignatius’ concerns:

The political challenge to the central bank’s authority comes at an especially delicate moment — as the economy begins to rebound and the Fed considers future tightening of monetary policy. It will need public support to combat inflation. But as the New York Times noted in a front-page article last week, the Fed is “under more intense attack than at any time in decades,” from both left and right.

This is nuts. Unemployment is over ten percent. And unemployment is rising! There’s no inflation happening. It would be good for the Fed to have public support in combating inflation if combatting inflation were a good idea. But it’s not a good idea. Not a good idea at all. To repeat, unemployment is at 10 percent and rising. All the evidence suggests that the Fed ought to be attempting additional monetary expansion to return the economy to an acceptable growth path, not tightening monetary policy to combat inflation. In fact, the expectation that if inflation emerges the Fed will stamp it out immediately has become a source of economic problems.

Conventional wisdom is in favor of central bank independence. But insofar as that CW has validity, it’s because it’s been our experience that independence leads to good monetary policy. A prolonged period of double-digit unemployment would mean, almost by definition, that your monetary policy is not good. But none of the world’s major central banks seem to feel that additional monetary expansion would be a good response to massive joblessness and sluggish growth. But if massive joblessness isn’t a good time for monetary expansion then when is? If Ignatius and Ben Bernanke don’t like the populist agitation happening right now, they’re really going to hate the populist agitation that’ll be happening after 12 more months of sustained high unemployment.