Galbraith Appears Before Ron Paul Hearing on the Federal Reserve

Michael Stephens | May 10, 2012

Congressman Ron Paul held a subcommittee hearing on reform of the Federal Reserve system a couple days ago that featured testimony from Senior Scholar James Galbraith, Alice Rivlin, John Taylor, Jeffrey Herbener, and Peter Klein.  There were a wide variety of topics addressed, including the size of the Fed’s balance sheet, proposals to make the Fed an arm of the Treasury, and changes to FOMC governance.

Also raised was the question of whether to (formally) drop the employment side of the Fed’s dual mandate (because with unemployment at the dangerously low level of 8 percent and inflation sky high around 2 percent, clearly we’d be better off if the Fed were more like the ECB …).  As Galbraith recounts, he himself was part of the team that drafted the Humphrey-Hawkins Act (“at a time of acute theoretical conflict in economics,” he points out), and he offers his defense of the dual mandate here:

As for the decided and observable tilt toward the price stability arm of the dual mandate, Galbraith collaborated on a working paper a few years back that identified the “real reaction function” of the Fed:  an aversion to full employment (“after 1983 the Federal Reserve largely ceased reacting to inflation or high unemployment, but continued to react when unemployment fell ‘too low.'”).  Although the working paper only covers the period 1984-2003, it raises an interesting contemporary question: even if Congress produced a substantial fiscal stimulus or managed to keep public employment levels anywhere close to where they were in 2008, to what extent would the Fed accommodate the expansionary effects?

Update:  Galbraith’s statement before the subcommittee can be read here.


3 Responses to “Galbraith Appears Before Ron Paul Hearing on the Federal Reserve”

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  1. Comment by TylerMay 12, 2012 at 10:41 am   Reply

    It appears the Fed operates under the popular assumption that low unemployment produces high inflation, an assumption which has been never been proven true in the entirety of American history. In fact, we have a very recent example of low unemployment producing low inflation, in the year 2000 when unemployment fell to 3.8 percent.
    I believe true full employment (an unemployment rate of 3 percent at the most) can be achieved without causing high inflation. Didn’t we put a man on the moon?

  2. Comment by Clonal Antibody — May 14, 2012 at 12:14 am   Reply

    I believe that the video URL has changed – the new URL is

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