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The Republican Long Game Against the Federal Reserve

Let’s be clear here. There are definitely intelligent ways to criticize the Fed’s QEII program: Matt Taibbi does a great job of it here, and so do these two cartoon bears (actually, the cartoon bears get a few things wrong). The fact that Treasury prices have gone up since QEII began gives a lot of credence to these arguments.

But Republicans aren’t really saying that. They’re saying that they don’t want the Fed to fulfill their mission of maximizing employment. Really. In fact, Mike Pence says it explicitly.

Rep. Mike Pence of Indiana, a top House Republican, said he plans to introduce legislation Tuesday to end the Federal Reserve’s dual mandate, which requires the central bank to balance both employment and inflation concerns in its monetary policy. … On Monday, he called for striking the dual mandate to force the Fed to focus only on price stability. The Fed today, under a 1977 law, also must pursue maximum sustainable employment… “The Fed’s dual mandate policy has failed,” Pence said in a statement. “For a record 18th straight month the nation’s unemployment rate is at or above 9.4 percent. It’s time for the Fed to be solely focused on price stability and not the recently announced QE2 which will monetize our debt and trigger inflation.”

The Fed probably would have moved to QEII even if they didn’t have a maximizing employment mandate, because they are failing at their price stability mission, too, and hope that quantitative easing can get the inflation rate pushed higher. But as Mark Thoma says, this leaves the federal government with no possibility to do anything in the wake of a broken economy – one Republicans broke, by the way. They oppose any fiscal policy to reduce unemployment, and they oppose the monetary policy as well.

In fact, they’re using some of that post-Citizens United funny money to hammer Ben Bernanke in service to a long-run argument against the Fed. Now, if people want to criticize the Fed, I’m not about to stop them. But let’s understand the Republican game here – it’s to paralyze government entirely. In such an every-man-for-himself environment, the malefactors of great wealth make out better than the peons. And so, that’s the desired end-state for the GOP. The other pursuit here is to equate monetary policy actions with big-government Obamaism.

As Mike Konczal notes, there’s a huge difference between criticizing Fed policy as not ideal or ineffectual and calling it a looming disaster. The status quo is the disaster. Monetary policy seeks at least to get money into the economy and increase demand. You can argue this is a bad way to do that, but that’s more of an issue with inert fiscal policy and a poor social safety net in America:

I’d also mention, about the European Central Bank (which only has a price stability mandate), is that European “maximum employment” policy is through a massive social safety net and a managed worker economy. Our labor markets are normally more dynamic, where the way of generating maximum employment isn’t requiring a worker to be on the board of a company by law and all kinds of other union-driven employment but instead through Federal Reserve monetary policy. If we want to ditch that Fed part, we need a serious new commitment to the safety net.

Or we could let a generation of workers be wasted while industrial capacity just sits around idle.


UPDATE: Sen. Bob Corker has reiterated the idea that the Fed should be stripped of its employment mandate.

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David Dayen

David Dayen