February 28, 2013

The Fed

Class readings and discussion in Austrian Economics have caused reflection on the mission of government, specifically the Federal Reserve. This organization is charged with limiting unemployment and maintaining stable interest rates. Recently, to achieve these goals, the Fed has conducted a policy of ‘quantitative easing’, increasing the money supply, in order to drive interest rates to an artificially low level and potentially decrease unemployment. Mises juggles the costs of having a “sound currency with unemployment, or inflation with full employment” (Mises, 72). He characterizes this policy as one of last resort considered only by those who view inflation to be a lesser evil than unemployment. In actuality inflation is not a cure for unemployment in the long run, rather it is in the short run that we face a trade off between inflation and unemployment (Mankiw).

It seems quite curios that such an esteemed agency is devoted to controlling two mutually exclusive endeavors. It seems that the pursuit of one will invariably be a detriment to the other. More troubling is the fact that the government is able to continue policies of stealth taxation by increasing the money supply. These are policies of an interventionist government. These are policies of a government that has clearly chosen inflation as the lesser evil to unemployment. Intervention in these areas will inevitably lead to conditions less favorable than prior. Mises indicates that the government control of “prices, wage rates, and interest rates” is clearly socialism. When reflecting on this, the purpose of the Federal Reserve became quite troubling. Certainly the country could carry on without such an entity. Some institutions such as banks might struggle in a world without the Fed, but such a world would truly be freer. This freedom would allow some institutions to make mistakes and fail. The freedom to fail is a necessary condition for capitalism to flourish. 

No comments: