Dual Mandate, RIP

by: Scott Sumner

I actually think Bernanke misspoke here, as I don't think he seriously intends to walk away from the Fed's dual mandate:

I guess the question is: does it make sense to actively seek a higher inflation rate in order to achieve a slightly increased pace of reduction in the unemployment rate? The view of the committee is that that would be very reckless. We, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation, which has proved extremely valuable in that we've been able to take strong accommodative actions in the last four or five years to support the economy without leading to expectations or destabilization of inflation. To risk that asset for what I think would be quite tentative, and perhaps doubtful, gains on the real side would be an unwise thing to do.

There's a great deal of confusion about the difference between a 2% inflation target, and a 2% inflation goal. The Fed can only hit one target at a time. Thus if it targets inflation at 2%, then it is completely incapable of doing anything to address the problem of unemployment. A 2% inflation target would be a single mandate. That's the ECB policy-an inflation target, with no weight given to the unemployed.

If the Fed does intend to adhere to a dual mandate, then it must target some sort of weighted average of inflation and output (Taylor Rule, NGDP, etc.) That means if unemployment is too high, the Fed must try to push inflation above 2%, and vice versa. If they don't try to do so, if they keep targeting inflation at 2% despite high unemployment, then they are not implementing a dual mandate. They would be doing a simple inflation target.

I think what Bernanke meant to say was that the Fed should not raise its long run inflation goal when unemployment is high. And that's certainly a defensible proposition. But he didn't express this view clearly, and hence got hammered by people like Paul Krugman and Brad DeLong. And I can't blame them, because the Fed is acting as if they don't care at all about the unemployed. It's acting like the ECB. Inflation has averaged much less than 2% since mid-2008, which would be an excessively tight policy even if the Fed didn't care at all about the suffering of the unemployed.

My hunch is that Bernanke does care about the unemployed, and wishes the Fed had done more. My hunch is that he doesn't have the Fed with him, but feels forced to defend Fed policy for political reasons. This is very awkward, and he occasionally stumbles. (It's also a very poor reflection on Obama's leadership, as he appointed 80% of the Board of Governors, including Bernanke.)

It's much easier to be head of the ECB, because you don't even have to hide the fact that you don't care about the unemployed. Commenter J.V. DuBois sent me the following:

The utter stupidity of ECB representatives is breathtaking. Have a look at this interview of Mario Draghi for Bild Zeitung: http://www.ecb.europa.eu/press/key/date/2012/html/sp120323.en.html.


"The key data for the euro area, such as inflation, the balances of payments and in particular budget deficits, are better than in the United States, for example"

Does anybody noticed what is missing there? Like mentioning such an unimportant data like unemployment/employment or growth? This is looking very bad.

Of course the eurozone unemployment situation is much worse than ours, and deteriorating further every month. But that's not "key data" to Draghi, who worries instead about things like balance of payments surpluses. At least the ECB admits that it doesn't care about the unemployed, the Fed merely acts like it doesn't care.

PS. There's another irony in the Bernanke quotation; he seems to suggest that the aggregate supply curve is currently very steep. That would be very odd given the high levels of unemployment. Is there any evidence for that? Given that unemployment has recently fallen from 9.8% to 8.2%, despite weak growth in AD, it seems likely that the SRAS curve is currently relatively flat. Why does he think otherwise?

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