On November 22, 2021, President Biden nominated Jerome Powell to be Fed chair for another four years. According to the Associated Press, “Biden praised Powell for his efforts to achieve maximum employment, but did not press him on inflation, which has emerged as the biggest economic threat to his administration” (Christopher Rugaber, “Biden to Keep Powell as Fed Chair…” 22 November 2021). Biden emphasized that Powell was a “believer” in “maximum employment.” Biden did mention inflation, but he also praised Powell for undertaking “a landmark review to reinforce the Federal Reserve’s mission towards delivering full employment” (“Remarks by President Biden Announcing his Nominees for Chair and Vice Chair of the Board of Governors of the Federal Reserve System” 22 November 2021). Biden is apparently referring to the decision to allow inflation to overshoot the target level (See Nick Timiraos, “Fed Looks to Relax Targets in Fighting Inflation” Wall Street Journal 3 August 2020, A1). Unlike President Trump, who publicly pressured Powell to cut interest rates, Biden “portrays himself as a defender of independent American institutions” (Greg Ip, “Inflation Risk: Little Now, But Some See Danger Ahead” Wall Street Journal 2 March 2021, A9). Indeed, during the speech, Biden said that he valued Powell’s independence. The Fed is supposed to be independent, but it is not a secret that Presidents have historically preferred Fed chairmen who prioritize full employment. In spite of the concerns about inflation, Biden appears to be more worried about unemployment. When it comes to the Fed, there is only a difference in degree between Trump and “the Establishment.” Although Biden’s speech may sound benign, a passage from an old book explained why an emphasis on “full employment” should actual fill us with a sense of foreboding.
In the nineteen-sixties, an author named himself after the economist Adam Smith in order to hide his identity. His book The Money Game became a “#1 Bestseller of the Year.” Although the tone of the book is often light-hearted and humorous, one passage is chilling. Whether you agree with Biden’s decision or not, his actions are a symptom of a mainstream mindset. Given the demands of democratic politics, his re-nomination of Powell may have even been too moderate. Perhaps inflation won’t be as bad as I fear, but the text of Biden’s remarks is not reassuring. Since inflation is currently an issue, let’s take a moment to read what “Adam Smith” wrote in 1967, a time of undeniable inflation:[i]
[T]he problem is universal. It is that governments are now held responsible for the welfare of the people. The aspirations of the people can outrun their ability to pay for them, and nobody has yet found a way to create answers to the aspirations out of thin air. What this means is that if governments have a choice between attempting full employment and defending their currencies, they will nearly always pick jobs over the worth of the currency. Currencies do not vote. In this country, the Full Employment Act of 1946 spells this out. The government is committed to full employment, and if it must pump money into the economy to achieve this, and if there isn’t enough money, it creates the money. Long-range inflation is the policy, articulated or not, of every country in the world. (The Money Game, 1967; Dell, 1969, 236 & 237)
Given that the U. S. government has been officially committed to “full employment” since the nineteen-forties, it’s not a surprise that inflation has been a perpetual problem. As Milton Friedman explained, “a full employment policy tends to be an open invitation to everybody to try to push up wage rates here, there, and elsewhere. The rises in wages rates lead to unemployment. In trying to counter the unemployment, the Government is likely to increase the money supply and this tends to produce inflation” (Dollars and Deficits, Englewood Cliffs, New Jersey: Prentice Hall, 1968, 39). During Biden’s speech, he said, “[I]t’s the Fed’s job to balance two key goals. The first is to achieve maximum employment…” In addition to the Full Employment Act, the Federal Reserve Reform Act of 1977 instructs the Fed to promote the goals of maximum employment and stable prices. Even if there were no laws regarding full employment, incumbents seeking reelection have long believed that defending the value of the currency just isn’t a priority. Although not an incumbent, Richard Nixon in 1960 was trying to stay in the White House after serving as Vice President. He concluded that voters are more upset about unemployment than they are about inflation. According to two best-selling authors, “Arthur Burns, chairman of the Federal Reserve during Nixon’s administration, had served as an advisor during Nixon’s failed 1960 presidential campaign. At that time, Burns warned Nixon that tight money policies would worsen the economy, hurting Nixon and ultimately costing him the election. Burns proved to be right” (Bill Bonner & Addison Wiggin, Empire of Debt, John Wiley & Sons, 2006, 178). Another Republican, who was an actual incumbent, also felt that tight money cost him an election. According to former Fed chairman Alan Greenspan, “I was saddened years later when I discovered that President [George H. W.] Bush blamed me for his loss. ‘I reappointed him and he disappointed me,’ he told a television interviewer in 1998” (The Age of Turbulence, New York: The Penguin Press, 2007, 122). Although the Fed is supposed to promote “stable prices,” the incentives to inflate are powerful and numerous.
According to President Biden, the second goal of the Fed “is to keep inflation low and stable.” See how “stable prices” has morphed into stable inflation. It’s clear to anyone who listens to a couple of minutes of a Biden speech—he wants to run on jobs. Powell has to be aware of the political realities. In a later book, “Adam Smith” wrote, “[N]o central banker is elected to his job; he is appointed. Somebody else is elected, and that somebody can usually fire the central banker or make life unpleasant for him” (Paper Money, 1981; Dell, 1982, 160). Powell has avoided being fired. Ostensibly, he is being retained because he can deliver full employment. Unfortunately, full employment policy “is … a modern invention for producing inflation” (Milton Friedman, Dollars and Deficits, 30).
[i] Silver coins disappeared from circulation during the mid-sixties because the silver content of the coin was worth more than the face value of the coin. The odds of finding a quarter dated earlier than 1965 are virtually zero. The rising price of silver was one of the manifestations of inflation.
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