This morning Paul Krugman wrote, The Inflation Obsession. It’s about the recent dump of Federal Reserve documents and how despite the economy in free fall and a long depression in process, the Very Serious Fed Members were obsessed with inflation. How obsessed? He quotes Matthew O’Brien, who took the time to count words in the transcripts. “In the meeting on Sept. 16, 2008—the day after Lehman fell!—there were 129 mentions of inflation versus 26 mentions of unemployment and only four of systemic risks or crises.”
Krugman goes on to discuss various reasons why the Fed was so obsessed with a non-problem like inflation and hardly at all with the very real problem of unemployment. He blames the cluelessness on the political philosophy of the board members. What they say is similar to what global warming deniers say: we shouldn’t do anything to fix the problem and even if we should, we couldn’t. The work of depressions must be completed. And if we did anything, it would turn us into Greece, Greece I tell you!
While all of this is true, I think the situation is simpler than Krugman makes out. The power elites who sit on the Federal Reserve board are only interested in their fellow power elites. The biggest threat to those who already have a lot of money is inflation, so the Fed is only really interested in inflation. They are interested in unemployment only in so much as it might harm the functioning of the economy. They are not at all concerned that one percentage point increase in unemployment means well over a million people lose their jobs.
What’s more, let’s not forget: high unemployment is largely good for corporations. It means they can have their pick of employees and there is no need to raise wages. In fact, it is an opportunity to lower wages. And employees become more compliant. From employers’ perspective, he only bad thing about high unemployment is that it keeps demand low. But at worst, it is a wash. So why should the Fed care about unemployment? It isn’t in the interests of their class, so they don’t care.
The Federal Reserve has a dual mandate to maintain price stability (low inflation) and full employment. This was established in 1977. But I don’t think most of those on the Fed have ever taken the employment provision of the law very seriously. Their focus has always been on inflation, and if inflation is well under control then they tinker with employment. We’ve seen this throughout our current crisis. The Fed targets 2% inflation, which I believe is too low regardless. But even with this low target, inflation has been too low. But the Fed has not shown any concern about unemployment, even at its peak of 10% in 2009.
By itself, it isn’t a problem that the Federal Reserve is the watchdog for the power elites. It actually makes sense, being a bank. The problem is that the rest of the government is also dedicated to ensuring that the rich stay rich. Given the state of things, however, it is an outrage that the Fed’s dual mandate means 99% focus on inflation and 1% focus on employment.