Two Targets, No Accountability

One thing the Bernanke reconfirmation controversy brings to mind is the fact that the Fed’s odd “dual mandate” makes it extremely difficult to say in any clear way whether or not a Fed chair has done a good job. If the Fed had an explicit mission to hit an inflation rate target, or if it was supposed to target a path of the price level, or (as Scott Sumner urges) it targeted nominal GDP, or anything else in particular than you could look back and evaluate past performance relative to the goal.

The dual mandate means there’s no clear performance criterion. It also means that FOMC decisions have a very political character, a struggle between hawks and doves rather than a technical dispute about meeting a congressionally mandated goal. Last the absence of a clear, unitary mandates means that pretty much any kind of action can be rationalized as necessary to preserve or enhance the Fed’s credibility or independence.

All this lack of accountability is in some ways good for Fed chairman who, if they’re lucky, get to become mysterious high priests of the economy, valorized as indispensable men. And conveniently it also works well for members of congress. Instead of needing to take responsibility and say something like “I think the target we’ve been using in recent years isn’t aggressive enough so I’m writing a bill to change it and will try to persuade people to sign on,” they get to sort of grouse from the sidelines in a non-specific way if things go bad. That’s win-win, but I’m skeptical it serves the country all that well.