Fed Reform?

Matt Yglesias has yet another post up pondering why Fed Chairman Ben Bernanke is continuing to ignore the problems of unemployment in our economy and instead is constantly focus on the non-existent threat of inflation.  As he sees it, the problem is Bernanke's poor communication skills and weak analysis:

He [Bernanke] said that if the economy improved enough, tapering would begin and he said it even though inflation is low and inflation expectations were falling. It's essentially a posture that looks at QE purchases as evil per se, and thus something to be halted in the face of good news even in the absence of inflation. The Evans Rule for interest rates embeds the dual mandate in the correct way, saying that mass unemployment will lead the Fed to temporarily ignore a bit of inflation. The taper criteria did the reverse, saying that good economic news means tighter money even if inflation is well-behaved. With that kind of dual mandate in place, bad news out of GDP revisions means tapering is less likely which means the stock market rises. Meanwhile, we're all left to cross our fingers and hope that the GDI number proves more accurate...

What we need is a new statement from the chairman that good news is not bad news and there's absolutely no chance of tighter money as long as inflation stays below target.

This could quite possibly be true, Bernanke could just be bad at communicating his intentions to markets and could just have a tendancy to royally screw up his press conferences and statements.

Or not.  As I see it, economists have been arguing for years now that the the reason the Fed has constantly prioritized fighting fantasy inflation over doing something about unemployment is a technical failure.  Analysis is incorrect, the correct information is not communicated or is done so in the wrong way.  Unfortunately their is a far simpler answer; while the Fed is required by law to keep inflation and unemployment low they actually don't believe in doing that and act accordingly.  That is if Bernanke et al. believe that unemployment is irrelevant (like the European Central Bank seems to think) their behavior may be bad policy, but it's not at all poor performance.  In short, a focus on nonexistent inflation while simultaneously ignoring unemployment is a feature, not a bug.

To broaden the conversation, I think it's important visit the political debates back in the 70's about where the dual mandate came from.  Originally Senator Hubert Humphrey teamed up with Congressman Augustus Hawkins from the Watts section of Los Angels to purpose a tough dual mandate provision for the Fed that would require them to aim for 3%(!) unemployment and if that failed offer New Deal style public works jobs as a stop gap.  Unfortunately Humphrey and Hawkins lost to powerful interest groups and politicians, including the President Jimmy Carter, and what we got instead was a toothless law that "required" the Fed to work towards full employment and low inflation, but had no mechanism to ensure that's what it actually did.

I'm not saying that Humphrey-Hawkins should be revived, but it's pretty clear that the present institutional setup of the Federal Reserve is not working for the American people, and hasn't been for some time now.  We should continue the discussions of Bernanke's follies, but progressives should also look for ways to fix the systemic problems currently going on as well.  Looking at a way to rewrite the rules of the Fed and how it operates should be at the top of that list.