Fixing the Fed

I liked Matt Stoller’s post about the need for progressives to respond to the Palinite challenge to the Federal Reserve with something more and better than reflexive defense of the existing accountability-free arrangement.

I’m of the technocratic temperament, so I think Stoller may find my own ideas on this score insufficiently populist, but it seems to me that the path to accountability starts with a more reasonable division of responsibility. One of the key problems with the existing “dual mandate” is that while the full employment side is routinely ignored in practice the very vagueness of the idea of simultaneously advancing two goals makes it impossible to draw a real criteria of what constitutes acceptable performance. A better set of monetary institutions would start, I think, with a single clear mandate. That could be an inflation target—deliver 2 percent per year. Or it could be a level target—deliver 2 percent annual growth in the price level. Or it could be a nominal expenditure target—deliver 5 percent annual growth in aggregate demand. Then instead of hearings being a farce of secrecy and grandstanding, things would be pretty clear-cut. Either the Fed would deliver on its target and officials would get a nice round of applause, or else results would be off-target and members of congress would be justified in yelling and demanding various people’s heads.

But then suppose the Fed is hitting its target (whatever that target may be) but people are unhappy with the overall macroeconomic results. Well then congress should change the target. The key here to me is that a clear division of responsibility—the Fed is supposed to hit a nominal target, and congress is supposed to set a nominal target that leads to good outcomes—promotes accountability. You’re not happy with what’s going on? You check who’s to blame. Is the Fed delivering what congress told it to deliver? If not, blame the Fed. If yes, blame congress.