For as long as I can remember, every Federal Reserve chairman, of either party, has fought vigorously to defend the Fed’s independence from the political arms of government.
And for good reason. The president and legislators face elections every two to six years, and have trouble thinking beyond the next campaign. But since the United States is a going concern that expects to stay open for business indefinitely, we want our central bank to maximize our economic performance over the long term, with the lightest possible demands for short-term results.
Congress has set out these short-term demands very explicitly: The Fed has a dual mandate, enshrined in American law, to try to achieve full employment while maintaining price stability. In contrast, take for example the mandate of Germany’s central bank, which is essentially only to maintain price stability - a policy it has tried to export to the European Central Bank ever since joining the eurozone.
Of course, the definitions of “full employment” and “price stability” are somewhat fluid. The Fed typically defines full employment as an unemployment rate in the range of 5 to 6 percent, and price stability, for now, is seen as an inflation rate around 2 percent. However they are defined, though, these are the two goals with which an effective Fed chair normally concerns him- or herself, because these are the benchmarks for maximizing the country’s economic performance in the long term.
The deal is pretty simple. The Fed’s job is to create the biggest possible pie. Elected officials get to decide how the pie should be distributed and consumed.
Yet Federal Reserve Chair Janet Yellen’s recent speech, “Perspectives on Inequality and Opportunity From the Survey of Consumer Finances,” betrayed a lack of appreciation for this straightforward division of labor and the sensible policies behind it.
Yellen declared that “the extent and continuing increase in inequality in the United States greatly concern” her. She characterized inequality as a threat to “opportunity,” and offered four “building blocks” for increasing the latter. Whether her solutions are wise or otherwise is not the biggest issue. The largest problem is that by focusing on income inequality at all, Yellen drags the central bank from an area that is clearly its purview into one that is much more political and, as a result, one that ties the Fed to the fortunes of the Democrats whose views she implicitly endorses.
In so doing, Yellen encourages political backlash from Republicans, the most extreme of whom already disapprove of many Fed policies. Such a backlash is in nobody’s best interest.
Yellen’s remarks buy into a Democratic propaganda line that somehow opportunities were ever equally distributed in American society in the past and are less equally distributed today, and that this alleged lack of opportunity is a long-term threat to the country’s prosperity.
When was this equal opportunity nirvana of which she speaks? Was it in the years after World War II, when women who had flocked to American factories were sent home to make room for returning war veterans? Was it the decades after the turn of the 20th century, when only a small fraction of Americans even aspired to college and leading universities imposed quotas on Jews and other recent immigrants, and when Jim Crow reigned in the South? Was it the decades after the Civil War, otherwise known as the Gilded Age, when the gilding was enjoyed almost exclusively by those whom today’s progressives would call robber barons? Or does Yellen’s reference go all the way back to the plantation economy that gave rise to so many of our Founding Fathers? Does she believe colonial America was the one in which opportunity was equal for all?
The phrase “equal opportunity” meaningfully entered our lexicon about 50 years ago, as a reflection of the new rules barring discrimination against women, racial minorities and other protected groups. It did not reflect any kind of national policy to attempt to achieve a mythical world in which the circumstances of a person’s birth have no impact on that person’s life. The concept merely meant that whatever the circumstances of one’s birth, no doors were summarily closed to one by default.
It is also worth noting that the Fed has embarked on its own major wealth distribution program for most of the past decade. It is what I call the war on savers: rock-bottom interest rates penalizing those who have accumulated wealth and benefitting, at least in theory, those both in and out of government who wish to borrow and spend it. Unfortunately, Yellen’s Fed and the administration that backed her promotion have made it so risky and cumbersome for borrowers outside of government to secure loans that the war on savers has ended up benefitting primarily the government itself and those with enough wealth to enjoy the post-crash rebound in stock and home prices. Thus the Fed has substantially contributed to exactly the income inequality that Yellen bemoans.
Yellen’s comments indicate that she understands neither the role of the Federal Reserve nor her own. It is not unreasonable to expect our central bank’s leader to understand history as well as economics and to refrain from presenting nonsensical campaign talking points, whose aim is to fire up a party’s base, as though those points are grounded either in economic theory or in historical fact, when neither is the case.