Most Americans have watched or heard Martin Luther King’s famous “I Have a Dream” speech, delivered before the Lincoln Memorial in Washington in 1963. Few know his rousing call for racial equality was the culmination of an event called the March for Jobs and Freedom.
This is crucial because it reveals the central, and largely unrecognised, role of the American civil rights movement of the 1960s on the US approach to economic policy. That included a more prominent role for government in economic stimulus policies and, importantly, a broader, jobs-focused mandate for the Federal Reserve.
That role is the focus of a new report by a group of Fed policy activists known as Fed Up, a coalition of community and pro-poor groups that have been pushing the Fed to adopt a more consciously pro-full employment stance.
“From the 1930’s and through the rise of the civil rights movement, racial justice activists including Coretta Scott King, called for a coordinated federal effort to attain full employment,” says the report, published in conjunction with the liberal Center for Economic and Policy Research, referring to Martin Luther King’s wife, who continued his fight after his assassination in 1968.
“They envisioned an economy where every person who seeks employment can secure a job. King joined Congressional leaders Augustus Hawkins and Hubert Humphrey in eventually passing the landmark 1978 Full Employment and Balanced Growth Act (Humphrey-Hawkins) which legally required the Fed to pursue maximum employment.”
Before the act, the mandate had been limited to low, stable inflation. To this day, Fed Chair Yellen’s semi-annual address to Congress on monetary policy, which is taking place on Wednesday, is known as the Humphrey-Hawkins testimony.
Fed Up and CEPR argue that the employment mandate, while not fully realised, has already generated millions of additional jobs over time, particularly in poor communities, which are most affected by steep levels of persistent unemployment.
“There can be no question that the Fed would never have allowed the late 1990s boom and the consequential sharp reduction in the unemployment rate if it did not have a full employment mandate,” the study argues after reviewing data from that period and the rationale used by then-chairman Alan Greenspan for keeping interest rates low despite falling unemployment.
The debate remains highly relevant today given that some Fed officials, despite their duty to maintain maximum employment, have recently expressed curious worries about the unemployment rate falling too quickly.
US unemployment has fallen sharply from a post-recession peak of 10% in 2009 to just 4.4% last month. This has prompted some Fed officials to worry a spike in inflation could be around the corner, despite continued signs that inflation is in fact slipping, along with inflation expectations.
To some Fed policymakers, like Minneapolis Fed President Neel Kashkari, this suggests the labour market has plenty of room for improvement, particularly if officials would really like to see substantive wage gains for the average US worker after decades of crippling stagnation.
“Nearly forty years after Humphrey-Hawkins was signed into law, a full employment economy that fulfils Coretta Scott King’s vision for racial and economic justice has yet to be achieved,” the Fed Up/CEPR report says. Other prominent central banks around the world, such as the European Central Bank, lack such an employment mandate, and have arguably been less aggressive in combatting joblessness.
The Fed Up/CEPR report flags two key political threats to the central bank’s continued focus on employment: Donald Trump’s potential picks to fill open positions in Fed leadership and Republican efforts to introduce legislation curbing the central bank’s powers.
“President Trump will soon attempt to fill three vacancies to the Federal Reserve Board of Governors. Many of the prospective nominees do not recognise the importance of the full employment mandate, and if confirmed, would likely undermine the Fed’s ability to achieve its full employment objective,” the report says.
“It is clear the Federal Reserve’s full employment mandate serves a critical purpose of making the Fed more accountable to the interests of working people. The racial justice implications of realising a full employment economy were widely recognised and fought for during the civil rights movement.”
Indeed, recent evidence shows the Fed’s efforts to keep interests rates low for a prolonged period have helped narrow the long-standing gap between white and black unemployment rates to its lowest level on record.
“Given African American unemployment rates are consistently twice the rate of white workers in 2017, realising true full employment continues to be vitally important today,” the report says. “As past economic conditions have illustrated, when labour markets tighten, workers begin to see broad-based wage gains and persistent economic inequalities are reduced.”
The organisations urge Fed officials “to use all tools at their disposal to fully realise the Fed’s full employment mandate.”
This means members of Congress themselves, the ultimate guides of the Fed’s mission, must reaffirm the importance of the Fed’s maximum employment mandate, Fed Up and CEPR said.
“In particular, the Senate must reject nominees to the Board of Governors who have called for the narrowing of the Fed’s mandate or who support policies that would undermine the Fed’s ability to pursue full employment.”
“I did a search of the hundreds of pages of [Fed] meeting transcripts. Based on that search, my conclusion is that there was no reference in the meetings to labour market conditions among African-Americans,” former Minneapolis Fed President Narayana Kocherlakota found.
“Monetary policymakers, with their needed independence, always risk being (or at least being seen as) insufficiently empathetic to the lives of their nations’ citizens,” he added. “The Federal Reserve Act has mitigated this risk in the US by ensuring that an appreciation for economic diversity is at the heart of the FOMC’s deliberations.”
That appreciation comes from the employment side of the Fed’s mandate, which the central bank should cherish rather than dreat — and pursue with the full strength of its powers. That should help counter the claims that Fed policy has primarily helped rich Americans by boosting asset prices while doing little to bump up workers’ wages.