US News & World Report To Fix the Federal Reserve, Fix Congress First April 27, 2012 There's a new effort in Congress to make the Federal Reserve more effective. Yes, you read that right. You might have thought the most broken thing in Washington is Congress, not the Fed. But the mirrors on Capitol Hill apparently don't work, so legislators aren't aware of their own abject ineptitude. All they see are problems elsewhere, which of course require Congressional action. The "Sound _Dollar_ (http://www.usnews.com/news/blogs/rick-newman/2012/04/27/to-fix-the-federal-reserve-fix-congress-first#) Act" introduced recently in the House, with a similar bill in the Senate, would end the "dual mandate" that makes it the Fed's mission to keep both inflation and unemployment in check. Up until 1977, the Fed's job was only to worry about inflation. But that year Congress directed the Fed to keep unemployment low as well, and the Fed has pursued both goals ever since. The focus on unemployment is controversial because the Fed doesn't necessarily have the tools to do that job. Lowering interest rates, the Fed's usual method, has an indirect effect on the labor market, at best. With rates now as low as they can go and the unemployment rate at 8.2 percent, it's hard to argue that low rates have done much to reduce unemployment. That's why the Fed has been experimenting with "quantitative easing" and other exotic types of _monetary policy_ (http://www.usnews.com/news/blogs/rick-newman/2012/04/27/to-fix-the-federal-reserve-fix-congress-first#) , which have accomplished a few things, such as boosting the stock market, but still haven't brought unemployment down by much. There's legitimate concern that so much easing might trigger runaway inflation in the future, which would mean that in the pursuit of one goal, the Fed lost sight of another. It's possible that the Fed simply can't do much about unemployment, and should, in fact, go back to focusing only on inflation. But if that happens, there will be one huge problem: It will be nobody's job to do something when unemployment gets too high. There are two basic ways the government can respond to an economic downturn and try to boost employment: monetary policy (the Fed) and _fiscal policy_ (http://www.usnews.com/news/blogs/rick-newman/2012/04/27/to-fix-the-federal- reserve-fix-congress-first#) (government spending). Congress controls spending, and in theory is supposed to work in tandem with the Fed to rejuvenate the _economy_ (http://www.usnews.com/news/blogs/rick-newman/2012/04/27/to-fix-the-federal-reserve-fix-congress-first#) when needed. How much confidence do you have that Congress would do a better job of reducing unemployment than the Fed? Congress has certainly tried, by passing the 2008 bank bailouts, the 2009 stimulus bill and a bunch of tax cuts and other measures meant to get the economy back on its feet. So you could argue that Congress has been just as ineffective as the Fed. Congress has also set the economy back with last year's debt-ceiling fiasco and its inability to do anything constructive about the mushrooming national debt. Its spending bills now require the government to borrow around $1 trillion per year that taxpayers will have to pay back some day, but there's no plan for how to do that. Here's what Congress should be doing: Coming up with a coherent plan for paying down the debt and making Washington solvent again. Simplifying the tax code. If Obamacare gets snuffed by the Supreme Court, devising a new way to solve the huge problem of skyrocketing health costs and 50 million uninsured Americans. And if Congress were really serious about fixing everything wrong with the government, it would pass strict new laws and perhaps even a constitutional amendment limiting corporate and special-interest donations to political campaigns. If Congress were to address those problems, trust in government would rise, CEOs would feel more confident, and hiring would pick up for sure. Here's what Congress is doing instead: Basically nothing. Huge decisions will have to be made about taxes, spending and debt within the next 12 months, but nobody's even talking about that because they don't want to frighten voters before the November elections. Instead, Congress is passing small-bore bills designed to seem serious but upset no entrenched interest. And of course each party is desperately trying to score political points and gain an edge in the elections, which is doing nothing whatsoever to make the nation better off. The Fed is an imperfect organization, and its results over the last few years have been decidedly mixed. But Congress is far more broken than the Fed. When are we going to see a Sound Congress Act? Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success.
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