(Bloomberg Opinion) -- Presidential candidate Joe Biden has caused a stir with an ambitious economic proposal: making racial equity part of the U.S. Federal Reserve’s mandate. Critics worry that such an explicitly political goal will compromise the central bank’s independence, and undermine its efforts to do what is best for the economy as a whole.
Actually, I think it’s a great idea. If Congress insists that the Fed act to reduce racial inequality in labor markets, it won’t benefit only Black Americans. It will achieve better economic outcomes for the country as a whole.
The Fed currently has a dual mandate: Promote stable prices and maximum employment. For Black people, it has systematically fallen short on the latter objective. Since 1972, when the Labor Department started reporting data by race, the Black unemployment rate has averaged 11.8%, more than double the 5.5% average for White people. The persistent gap means that for most of the post-World-War-II period, Black people have lived in a permanent recession deeper than anything their White counterparts have experienced.
So what would happen if the Fed focused more on reducing the racial unemployment gap – for example, by accommodating economic growth with lower interest rates? Some depict this as a zero-sum game, in which any gain for Black people invariably means a loss for others. It’s demonstrably not. Consider, for example, the relationship between the Black-White unemployment gap and the broader unemployment rate:
The two move closely in sync, which suggests that a monetary policy aimed at reducing the racial gap will also reduce overall unemployment. Granted, there’s always a risk that keeping interest rates too low for too long will lead to unduly high inflation. But inflation has been below the Fed’s target for most of the past decade, and is expected to stay low for years to come.
The broader point -- that labor-market equity policies can benefit everyone -- doesn’t apply only to the Fed. The central bank has the power to reduce the large and persistent racial gaps in unemployment rates, and Congress should hold it accountable for its use of that power, as the Biden campaign proposes. But in times like now, when the Fed’s monetary ammunition is depleted, Congress should also use government spending to support growth and ease the racial inequality that recessions invariably exacerbate. If the entire government shares the commitment to racial equality, we’ll all be better off.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Narayana Kocherlakota is a Bloomberg Opinion columnist. He is a professor of economics at the University of Rochester and was president of the Federal Reserve Bank of Minneapolis from 2009 to 2015.
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