Don't blame the Fed

Amity Schlaes

KAI RYSSDAL: Ben Bernanke schlepped up Capitol Hill again today for an appearance before Congress. He spent a lot of time explaining why the recovery doesn't feel like one -- said it's faltering, in fact. The debt crisis in Europe. Weak consumer confidence. Poor job growth. All of them weighing down U.S. growth.

Mr. Bernanke also said the Fed is to ready help where it can -- a position that's not without its critics. Commentator Amity Shlaes, however, isn't one of them.


AMITY SHLAES: The nastier people are when they make an argument, the less evidence they have for it. That's one of the iron rules of life, and it also holds for the attacks on Ben Bernanke. Politicians might say the Fed chairman is overreaching or imperial, but they're skipping the substance.

The substance is that Bernanke did not make the Fed arrogant. The Fed's arrogance is institutional based on laws passed long before Bernanke was born. After the unemployment of the Great Depression, Presidents and Congress wanted to assure people that Washington would never let such unemployment occur again. Jobs, jobs, and jobs, were it.So Congress passed -- and President Truman signed -- a law called the Employment Act of 1946. Nothing subtle about that name.

Even if jobs weren't the Fed's traditional mandate, the Fed knew it had to help. Presidents helped, too. Presidents Eisenhower and Truman picked officials for the Fed who believed the Fed should manage both employment and growth.

That extra Fed job of managing employment was formalized in a later law. It was passed while Ben Bernanke was a mere grad student at MIT. This next Fed law, known as Humphrey-Hawkins, mandated that the Fed watch long-term growth. That's now code for "unemployment." So, twice a year the Fed chairman has to testify in front of Congress. And that means a grilling about jobs.

But the thing is government, whether the Fed, Treasury or Congress, hasn't proven very good at creating jobs in these last crisis years. Turns out a jobs obsession doesn't always lead to jobs. It is the private sector's turn to try to make jobs. But that private sector can only do so if the Fed moves out of the private sector's way. And that won't happen no matter how hyperbolic the critics get. The solution is a new Fed law that narrows the Fed's mandate to keeping money stable. Then the critics won't need to vilify the Fed head, whether it's Ben Bernanke, or someone else.


RYSSDAL: Amity Shlaes is a senior fellow in economic history at the Council on Foreign Relations. Send us your comments.

About the author

Amity Shlaes is author of the biography “Coolidge,” and she directs the economic growth project at the Bush Presidential Center.

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