On April 14, 2021, Representative Maxine Waters (D‑CA) introduced the “Federal Reserve Racial and Economic Equity Act” (H. R. 2543). One of the major purposes of her bill is “to modify the goals of the Federal Reserve System.” Section 201 would require the Fed, in its conduct of monetary policy, to “minimize and eliminate racial disparities.” A new clause (Section 2C) would be added to the Federal Reserve Act stating:

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall exercise all duties and functions in a manner that fosters the elimination of disparities across racial and ethnic groups with respect to employment, income, wealth, and access to affordable credit.

The Financial Services Committee sent Waters’ bill to the House floor where it passed by a vote of 215 to 207 on June 15, 2022. The bill—now titled “Financial Services Racial Equity, Inclusion, and Economic Justice Act”—was referred to the Senate Committee on Banking, Housing, and Urban Affairs on June 21. President Biden supports the bill, but at this time the chance of it passing the Senate is slim (about 11 percent). Nevertheless, the bill deserves widespread attention.

Subjecting monetary policymakers to the task of eliminating economic disparities across racial and ethnic groups would further politicize the Fed, undermine its credibility, and clash with the ideal of equal treatment under the law. Having unelected policymakers at the Fed draw the line between what is just and unjust with regard to economic outcomes would risk undermining the market price and profit system, which has been the main engine for reducing poverty.

A Utopian Goal

Maxine Waters, Elizabeth Warren, Kirsten Gillibrand, Bernie Sanders, and others in Congress who support expanding the Fed’s mandate to eliminate disparities in employment, income, wealth, and access to affordable credit across racial and ethnic groups suffer from the illusion that the Fed, or any other agency, can actually do so. All individuals can be said to have certain unalienable rights and, in that sense, they are “created equal.” However, it is self-evident that individuals across and within all groups differ significantly in their abilities, interests, preferences, and knowledge. To think otherwise is to disregard reality.

Basing law on false presumptions and utopian goals is bound to undermine the natural rights of life, liberty, and property that each individual can share in without depriving others of their equal rights. Adam Smith, in his 1762 lecture “Of Jurisprudence,” called these “perfect rights”—because they are rights that all individuals “have a title to demand and if refused to compel another to perform.” In contrast, “imperfect rights” relate to “those duties which ought to be performed to us by others but which we have no title to compel them to perform.” Smith emphasized that only perfect rights are consistent with “commutative justice,” while imperfect rights, which he called “metaphorical” rights, are associated with “distributive justice” (see Dorn 2012).

From the perspective of jurisprudence, justice is best understood as the absence of injustice. As Frederic Bastiat clearly stated in his famous essay, “The Law” (1850):

When law and force confine a man within the bounds of justice, they do not impose anything on him but a mere negation. They impose on him only the obligation to refrain from injuring others. They do not infringe on his personality, or his liberty or his property. They merely safeguard the personality, the liberty, and the property of others. They stand on the defensive; they defend the equal right of all. They fulfill a mission whose harmlessness is evident, whose utility is palpable, and whose legitimacy is uncontested.

A law that would have the Fed attempt to eliminate all economic disparities across racial and ethnic groups, and promote “economic justice,” is inconsistent with a genuine rule of law, or what F.A. Hayek called “rules of just conduct.” It would be impossible to maintain the constitutional principle of equal treatment under the law if government officials (in this case monetary policymakers) could impose some subjective standard of economic justice on an emergent market order based on personal choices by millions of people in their everyday activities. Fed officials simply don’t have the information to do so. This is the Hayekian knowledge problem facing any central planner.

The Constitution gives Congress the power “to coin money” and “regulate the value thereof” (Article 1, Section 8). That power has been delegated to the Federal Reserve, which has the primary duty of safeguarding the long-run purchasing power of the dollar. Money that maintains its long-run value benefits everyone. In contrast, monetary policy aimed at attaining “economic justice” opens the door to all kinds of mischief—and blurs the line between fiscal and monetary policy. If Waters’ bill were to become law, the Fed would become subject to much stronger political pressure to satisfy special interests rather than serve the general interest by maintaining sound money and credit.

In volume 2 of Law, Legislation and Liberty ([1976] 2021), Hayek emphasizes the conflict between using the law to reduce economic disparities versus using the law to safeguard persons and property. His argument is straightforward:

Since people will differ in many attributes which government cannot alter, to secure for them the same material position would require that government treat them very differently. Indeed, to assure the same material position to people who differ greatly in strength, intelligence, skill, knowledge and perseverance as well as in their physical and social environment, government would clearly have to treat them very differently to compensate for those disadvantages and deficiencies.

That is the great problem the Fed would encounter if Congress were to expand the central bank’s mandate to include eliminating economic disparities across racial and ethnic groups.

Thomas Sowell’s Warning

In his landmark book, Knowledge and Decisions (1980), Thomas Sowell warned that “attempts to sum up disparate characteristics ignore the diversity of personal values which makes it impossible to have objectively recognized, fungible units in which to add up totals.” Moreover, he points out that, in Regents of the University of California v. Bakke (1978), the Supreme Court held “that the Fourteenth Amendment grants ‘equal rights’ to individuals—not group rights, and certainly not special rights to one group historically connected with the origin of the Amendment.”

Notably, Sowell argues that the Court itself is cognizant that:

Any group rankings by harm suffered and remedies available would be transient, requiring repeated incremental adjustment as the judicial remedies take effect, and the “variable sociological and political analysis” necessary for this “simply does not lie within the judicial competence—even if they otherwise were politically feasible and socially desirable.”

Likewise, one could argue that eliminating economic disparities across racial and ethnic groups does not lie within the Fed’s competence.

Politicization of Monetary Policy

If the Fed were made responsible for eliminating “disparities across racial and ethnic groups with respect to employment, income, wealth, and access to affordable credit,” monetary policy would become highly politicized, and the “menace of fiscal QE” that George Selgin has warned about would become a reality.

Politicians would see an opening to use the Fed, even more than they do now, as a way to circumvent the normal budgeting process and have the central bank engage in “backdoor” spending to satisfy demands for “economic justice.” The Fed’s credibility and independence would suffer as a result. The ideal of “equal treatment under the law,” which is realizable, would give way to the illusion that distributive justice can be attained without reducing individual freedom, wealth creation, and social harmony.

Moreover, insofar as the force of law is able to decrease inequality of income and wealth, there would be a corresponding increase in the inequality of power. As Peter Bauer explained in Equality, the Third World, and Economic Delusion (1981):

In an open and free society, political action which deliberately aimed to minimize, or even remove, economic differences (i.e., differences in income and wealth) would entail such extensive coercion that the society would cease to be open and free. The successful pursuit of the unholy grail of economic equality would exchange the promised reduction or removal of differences in income and wealth for much greater actual inequality of power between rulers and subjects.

Differences in income and wealth, and in unemployment rates, are due to many factors other than racial or ethnic discrimination. The Fed cannot impact real economic variables in the long run, but it can influence the path of total spending and the price level. Mandating the Fed to use monetary policy to eliminate economic disparities across racial and ethnic groups ignores the real causes of differences in income, wealth, and unemployment rates among individuals.

Real Causes of Disparities in Economic Outcomes

In his work on economic development, Bauer was primarily interested in expanding the range of choices open to people (see Dorn 2002). Like other classical liberals, he saw the expansion of free markets and limited government as essential for human progress. State interventions restricting trade—both in product and factor markets—may help certain individuals or groups but only at the expense of limiting freedom and overall development. Bauer provides numerous examples of how individuals lifted themselves and their families out of poverty once markets were allowed to operate and property and persons were protected under a just rule of law (see, e.g., The Development Frontier 1991).

The most important thing the Fed can do to help improve living standards for all people is to ensure that monetary policy is aimed at preventing monetary disturbances that cause inflation and severe recessions, both of which undermine markets and the price system’s ability to allocate resources efficiently. Meanwhile, Congress needs to rethink failed policies that restrict freedom of choice; it also should control spending, reduce onerous taxes, and respect the demarcation between fiscal and monetary policy (see Dorn 2020).

Conclusion

Adding a new mandate that requires the Fed to eliminate economic disparities across racial and ethnic groups—and achieve “economic justice”—is impractical, unconstitutional, and a threat to what Hayek calls the “central concept of liberalism,” namely:

That under the enforcement of universal rules of just conduct, protecting a recognizable private domain of individuals, a spontaneous order of human activities of much greater complexity will form itself than could ever be produced by deliberate arrangement, and that in consequence the coercive activities of government should be limited to the enforcement of such rules.

The first rule for setting goals for any institution is that they are realizable—and that applies to the Fed. As Charles Plosser, former president and CEO of the Federal Reserve Bank of Philadelphia, writes, “When establishing the longer-term goals and objectives for any organization, and particularly one that serves the public, it is important that the goals be achievable. Assigning unachievable goals to organizations is a recipe for failure.”

The Fed has never placed a precise number on its maximum employment goal because it is generally recognized that the Fed can only impact nominal variables and that nonmonetary factors play the key role in determining the natural (long-run equilibrium) rate of unemployment, which itself is not directly knowable. Thus, in its “Statement on Longer-Run Goals and Monetary Policy Strategy,” the Federal Open Market Committee declares:

The maximum level of employment is a broad-based and inclusive goal that is not directly measurable and changes over time owing largely to nonmonetary factors that affect the structure and dynamics of the labor market. Consequently, it would not be appropriate to specify a fixed goal for employment.

That leaves long-run price stability as the Fed’s primary goal, which is achievable.

Adding “economic justice,” which is an open-ended goal and not achievable in any meaningful sense, to the Fed’s mandate would greatly politicize the Fed, decrease its credibility and independence, and result in failure.

There will always be disparities in economic outcomes, whether across groups or within a given group. People differ in myriad ways. Trying to use the force of law to eliminate differences increases the power of some at the expense of others. Ignoring these evident facts in designing policy risks weakening the social and economic harmony that emerges when people are free to choose and their property rights are protected by law.

As Bauer, in his essay “Egalitarianism: A Delicate Dilemma,” points out:

If people’s circumstances and capacities, including economic aptitudes and motivations, were substantially the same, incomes would be largely equal in an open society. Thus the establishment of such a society would suffice for economic equality, without special taxation, let alone more drastic interference with voluntary arrangements. In fact, differences in circumstances, motivations, and aptitudes, including the ability to seize economic opportunities, ensure appreciable differences in incomes in an open society. Political action to reduce these differences or prevent their emergence requires an extension of state power incompatible with a free society.

The conflict between egalitarianism and freedom should be a focal point in where to draw the line between assigning the Fed a limited role of maintaining long-run price stability, and thereby helping to achieve maximum employment, and making racial equity a new mandate for the central bank.

Congress would have a better chance of promoting all-around prosperity if it focused more on eliminating barriers to engage in mutually beneficial, voluntary exchanges—rather than trying to impose new mandates on the Fed that cannot possibly be achieved.

Strengthening market institutions, so that all individuals are free to develop their abilities to the fullest, would offer an alternative that is consistent with equal treatment under the law. It also is more likely to lead to economic and social harmony than legislation aimed at the elusive goal of eliminating economic disparities across racial and ethnic groups.