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Saturday, September 1, 2012

The Federal Reserve on Full Employment: A Democracy Deficit?

The American economy expanded during the second quarter of 2012 at an annualized rate of 1.7 percent. Meanwhile, the unemployment rate for all of the American states combined was expected to remain above 8 percent. In this context, the chairman of the Federal Reserve, Ben Bernanke, remarked, “It is important to achieve further progress, particularly in the labor market.” In other words, the free market cannot be relied on to reach full employment. More is needed. “Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.” In other words, the central bank would enact a pro-employment policy. From the standpoint of democracy, the choice of the Fed to engage in such a policy is a double-edged sword.

                                                                                                   Fed Chairman Bernanke.                    Reuters
On the one hand, Bernanke was able to defy political pressure from Republicans to refrain from such a measure. Sen. Charles Schumer (D-NY) said that the Fed chief “should not let any political backlash deter him from following through and doing the right thing.” At the very least, short-term political pressures oriented to an upcoming election should not be allowed to thwart more long-term policy oriented to full employment.
On the other hand, from the standpoint of democratic legitimacy, a policy enacted by a body that is buffered from elected representatives can be problematic. Ironically, it was Bernanke who had urged Henry Paulson of the U.S. Treasury to appeal to Congress to pass the bank bailout (TARP) because only such passage could have democratic legitimacy. Accordingly, Sen. Bob Corker (R-TN) had this to say of Bernanke’s musings on a pro-employment policy from the central bank. “Policies from Congress, not more short-term stimulus from the Fed, are the ingredients necessary for restoring growth in the American economy.” The senator could have cited the U.S. constitutional convention, whose delegates had vested the U.S. House of Representatives with the sole power to initiate spending (i.e., the power of the purse). It is particularly dangerous for a body insulated from political pressure to engage in economic stimulus if that body has the unlimited power to create money. At the very least, inflation could ensue from too much stimulating; and yet, it should not be supposed that the market itself can reach full employment.
It may be that the constitutional design of American federalism wherein the various checks and balances on the federal level operate in effect to “push” policy down to the republic or state level. Employment policy from the Federal Reserve could simply be the point of least resistance. In other words, the central bank may be the only option short of the state governments when the Congress and the U.S. president are at logger-heads. The cost is not simply in terms of democratic legitimacy, for the American founders made federal legislation difficult to enact in part so the federal government would not encroach on the powers reserved to the member states. In other words, action by the Fed may take the pressure off the federal elected representatives, but at the expense of federalism (i.e., the state governments being able to check the federal government). To be sure, full employment is a worthy objective, but the “how” and “by whom” are also worthy of consideration.


Binyamin Appelbaum, “Fed Chairman Makes Case, in Strong Terms, for New Action,” The New York Times, August 31, 2012. http://www.nytimes.com/2012/09/01/business/economy/fed-chairman-pushes-hard-for-new-steps-to-spur-growth.html?_r=1&hp