A Stronger Social Safety Net Would Free the Fed

by Dollars and Sense

It's a widely held view that Chairman Ben Bernanke and his fellow policy makers are facing a worrisome mix of tepid growth, troubled financial conditions and rising price pressures, with few attractive options for fixing this toxic environment. The weak economy and market tumult call for rate cuts. But the energy-driven price gains and deteriorating expectations for future prices call for rate increases.

That's left the Fed stuck at its current rate of 2%, very likely for an extended period. But according to Frank, if the U.S. social safety net weren't so miserly, the Fed might actually have more room to take on inflation.

In response to testimony on the economy by Bernanke Wednesday, the Massachusetts Democrat said current conditions suggest "we have reached a limit" on what the Fed can do with interest rates. He acknowledged arguments on both sides of the rate change calculus. But perhaps more importantly, he reckoned the Fed is now losing some of its ability to get inflation under control because it would cause a politically unpalatable worsening in already bad economic conditions. "The relative insufficiency of our social safety net vis-á-vis what you have in Western Europe constrains monetary policy," Frank said.

If the U.S. offered more support for the unemployed and displaced, "the Federal Reserve would then be freer…to slow down the economy in the knowledge this would not have a disproportionately negative effect" on the working population. That part of the population is already losing notable ground in economic terms, he said.

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7/17/2008 05:03:00 AM