Getting to Grips with the Federal Reserve’s Mandate to “Foster Maximum Employment”

The Federal Reserve has two main objectives:

 

  1. to “Maintain Price Stability” (which explains Janet Yellen’s recent denial of the link between ‘money printing’ and commodity price rises).
  2. to “Foster Maximum Employment”.

Here, I get to grips with the second objective of “fostering maximum employment”. Jargon aside, I try to answer the pertinent question; what does this task really involve?

 

What is Employment?

 

An employment contract involves an employer and an employee. On the one hand, the employer prefers the employee’s labour to the money he pays for it (wages). Whereas on the other hand, the employee prefers the money he receives (wages) to the services he provides. So, an employment contract involves two parties that prefer precisely the opposite things to one another. If employers and employees do not have such mutually inverse preferences, then no deal can take place. When there is a large number of people who ‘cannot find a deal’, the unemployment rate rises.

 

The Endeavor of “Fostering Maximum Employment”:

 

So, what is the essence of the Fed’s objective to “foster maximum employment”? What are they really trying to do here?

 

Well, as employment contracts are the product of mutually inverse preferences between employers and employees, we can say that the Fed aims to foster such preferences. That is, they’re trying to get employers and employees to deal with one another.

 

At first sight, this seems like a benign practice; after all, what’s wrong with encouraging cooperation, right? My personal response to this knee-jerk reaction is that the Fed is a government-backed institution. So any such claim to ‘encourage cooperation’ is rudely contradicted by the fact that it is uncooperative by definition. That is, they use force to hold their existence in place – they use the gun to maintain and proliferate their presence.

 

Even with the above aside, we can show that this mandate is rather more sinister than it may initially seem.

 

The Fed’s Means – Monopoly Control on Money:

 

The Federal Reserve’s ultimate source of power lies in the fact that it is the monopoly money producer for the US and  - arguably – for the world. Within the parameters of what the market will tolerate, the Fed can change the structure of the dollar. To a degree, it can debauch or improve the dollar – this is its basic power.

 

When this rudimentary fact is put alongside its aim to induce inverse preferences amongst employers and employees, the truth about their mandate is revealed: As the Fed’s means is to move the dollar, then one party (employer or employee) must always benefit at the other’s expense (at the nominal levels). Thus, they can only “foster maximum employment” by tricking either the class of employers or the class of employees.

 

For example, suppose that a prospective employee wants at least $20’000/year and that a prospective employer wants to pay $15’000/year at most. In this scenario, they wouldn’t be able to do a deal. The Fed can either debauch or improve the dollar. Let’s say that it debauches the dollar to imply that 15’000 old dollars is now equivalent to 20’000. If both employer and employee stick to their nominal minimums, still no deal can take place. Moreover, if the they both realize that this change has occurred, then  - again – no deal takes place (the employer will pay $20’000 but the employee wants $26’666). The only time when a deal can take place is when the employee is tricked into holding his original dollar requirement, and the employer isn’t. [Note: By symmetry, the employer can be 'tricked' also]

 

The Fed can only succeed at this mandate by tricking people. Even if you advocate government, can you really regard this as a sensible goal?

 

Remarks:

 

With the above in mind, consider the nature of the Fed’s success. Whenever the Fed says something like “we engineered an unemployment rate of X%”, what they’re really saying is that ‘we tricked enough people into hiring and taking jobs to entail an unemployment rate of X%‘. Indeed, advocating this mandate can be regarded as oxymoronic. For, in advocating this mandate, one is really saying that ‘the Fed should trick us’. Or – even more accurately – ‘we should establish and maintain an institution (the Fed) that is in the business of tricking us’.

 

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Posted Apr 17, 2011
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