Be grateful the Fed is not the ECB
Thank heavens for the politicization of the U.S. central bank
The Federal Reserve is meeting again this week to decide what to do about interest rates. Earlier this year, it surprised everyone by pausing indefinitely its recent run of rate hikes. All indications are that the pause will continue.
This is to the central bank's credit. The Fed is a deeply flawed institution, but its record since 2008 suggests a willingness to think broadly, to adapt, and to seriously weigh ordinary Americans' need for jobs and wages.
By contrast, the other most powerful central bank in the world — the European Central Bank — spent the last decade running much of the continent into the ground in single-minded pursuit of low inflation.
Over the years, mainstream Western policymaking has reached a certain ad hoc consensus: While governments should try to fight recessions and provide welfare aid to their citizens within reason, their tax and spending policies should ultimately focus on minimizing year-to-year deficits and containing their overall debt load. The job of managing the macro-economy — balancing aggregate demand with supply, and thus controlling inflation — should fall to central banks, which use interest rate adjustments and other methods to manage the supply of credit.
But British historian Adam Tooze points out that the U.S. Federal Reserve is somewhat unusual among central banks in prioritizing both prices and employment, which became part of its mandate in 1978 with the Humphrey-Hawkins Act. The mandate for the ECB, on the other hand, directs it to worry about inflation alone.
In the aftermath of the global financial crisis, this difference between a dual mandate and single mandate certainly seemed to matter. The Fed dropped its interest rates to zero almost immediately, and kept them there for at least seven years. It only began gradually hiking — a mere 0.25 percentage points, three times a year at most — in December of 2015. The ECB, on the other hand, dilly-dallied, dropping its target close to zero but not all the way, then raising it slightly in 2011, before gradually falling to zero over the next few years, where it remains. The Fed's strategy of interest rate hikes since 2015 was almost certainly too much too fast, but not by much. Compared to Europe's ongoing struggles, the U.S. economy is one of the global bright spots today. When it mattered in the depths of the crisis, the Fed acted.
Beyond short-term interest rates, there was also the Fed's massive quantitative easing (QE) program, which it kicked off almost immediately. It's difficult to say exactly how much QE mattered in the end. But the Fed tried, weathering a remarkable backlash from inflation hawks in Congress and the economics profession in the process, and was ultimately vindicated with a recovering U.S. economy and inflation that never budged. Again, the ECB twiddled its thumbs and did not begin experimenting with QE until 2013.
Finally, there's the matter of how the ECB dealt with specific national crises, particularly in Greece. A single currency and monetary policy spread across multiple national fiscal policies is far from ideal. But the ECB could have surmounted those obstacles if it wanted to. It could have bought government bonds en masse from specific countries, like Greece, who desperately needed the big fiscal stimulus measures. And the overall design of the eurozone's central banking system allows new euro supplies to be created and directed into the specific places where help is most needed.
The ECB simply refused to take advantage of any of this. As Tooze writes, the ECB instead used its leverage for an explicitly ideological project of smashing welfare states and imposing crushing austerity.
As a result, America's unemployment rate today has fallen to a remarkable low of 3.8 percent. Eurozone unemployment peaked at 12 percent in 2013, and remains around 8 percent today. It's far worse in the eurozone countries hit hardest by the crisis.
Looking back over the history of the ECB's construction, and the statements of its supporters, economist J.W. Mason concluded that the whole point of the euro system was to subordinate democracy to the money claims of the financial system and private wealth holders — to "roll back social democracy and to reimpose the 'discipline of the market' on the state."
In truth, if we look back beyond 2008, the U.S. Fed shares many of these same instincts. The ink on the Humphrey-Hawkins Act was barely dry when Fed Chairman Paul Volcker brazenly threw it overboard, setting off a massive recession to tame inflation. The U.S. central bank's institutional culture is deeply bound up with that of Wall Street and business owners, which prize low inflation while ignoring or even preferring high unemployment. The Fed's record since Volcker's time clearly demonstrates those same biases. Its relatively worker-friendly policy after 2008 was a long and hard-won concession.
The great difference between the ECB and the Fed may be that the latter has actually been the subject of explicit political fights. The ECB operates behind an immense veil of both ideological consensus and byzantine political and policy processes.The Fed, however, has found itself the target of political movements and activist ire on more than one occasion. The dual mandate resulted from a push for a full employment guarantee, born aloft by the remaining power of the Civil Rights movement. Today, the Fed finds itself the focus of an ongoing and organized pressure campaign by progressive economists and working-class activists. Even Democratic policymakers are beginning to get in on the act.
Ultimately, the dual mandate is as much a symptom of the Fed's differences with the ECB than a cause. It is de rigueur among America's Very Serious People to insist the Federal Reserve never be politicized; its monetary policy decisions should be left to the technocratic experts. Ironically, it's the ECB that comes much closer to meeting that ideal.
America has always fallen short. And we are indisputably better for it.