Political Correctness of the Fed

We all acknowledge that political correctness is a problem - that it can chill free speech and that it can reduce the quality of public discourse. But political correctness can do more than that. It can hurt economic growth.

Anyone who wants to challenge this last assertion as a polemicist's stretch may want to consider a controversy involving an author, Harry Stein, and the Federal Reserve Bank of Dallas and its president, Robert McTeer.

As Dallas Fed president, Mr McTeer is one of the most influential monetary policymakers in America. Along with the other regionally based Fed presidents, he rotates on and off the Federal Reserve's Open Market Committee, where regional presidents set policy with the Washington-based Board of Governors.

Overall, US monetary policy has had its critics, but certain things about it are incontrovertible. One is that over years it has succeeded in bringing US interest rates down - by a full three percentage points, in the 1990s-and that that reduction has been a social good. The lower rates fuelled overall growth. But they especially benefited homebuyers, and very especially lower-earning home buyers, a group that includes many minorities.

Mr McTeer's role was central here; as a "new economy" advocate on the FOMC, he championed the argument that productivity increases from new technology were reducing the threat of inflation and so permitted lower interest rates. This, especially in the late 1990s, amounted to economic heterodoxy. In recent months, Mr McTeer has been in the news again. In September, he joined Governor Ned Gramlich in a dissent against FOMC policy that called for loosening money. Come this week, that dissent became the majority opinion and brought about a 50 basis point rate cut.

Like most original characters, Mr McTeer demonstrated his originality in a number of areas; he fashioned the staid Dallas Fed into something of a splashy think tank, inviting speakers with a range of expertise.

Such work means that Mr McTeer is sometimes mentioned as one of the possible successors to Fed Chairman Alan Greenspan. But candidates for Fed jobs must be able to sail through confirmation hearings in the US Senate. Political baggage, especially baggage in sensitive areas, is a potential disqualifier. And recently Mr McTeer acquired just such baggage.

This reversal stems from a speech Mr Stein, the author, delivered in Dallas upon the invitation of Mr McTeer last spring. Mr Stein's topic was his recent book, How I Became Part of the Vast Right Wing Conspiracy (And Found Inner Peace). In the book, Mr Stein humorously chronicles his story as the child of communists and his conversion from leftwing youth to conservatism. Then he attacks the political intolerance of modern feminism, modern multiculturalism, and so on.

At one point in his speech, Mr Stein spoke about an incident that occurred at his son's school. The class was reading Mark Twain's Huckleberry Finn. Huckleberry Finn contains racist language, to which Mr Stein referred. But its central plot line is about Huck choosing - in the face of high penalties - to save Jim, his runaway slave buddy, from recapture by his master.

The son's teacher expressed disapproval of the book, Mr Stein reported, "because it is racist". Mr Stein's son argued the book was anti-racist. The teacher asked how the boy would like it if they read an anti-semitic text (Mr Stein is Jewish). The son replied that the class had read such a book - Mein Kampf - in an earlier class. The general point of Mr Stein's story was that (the teacher's) political correctness discouraged debate, rather than encouraged it.

Apparently some people in the audience at the Dallas Fed thought that such discouragement was a good idea. In question time, one guest rose to say that "I was personally offended by your jokes" and warned that Mr Stein's true point "may be lost on many" who hear of his story. The suggestion was that Mr Stein's anti-racist anecdote might be interpreted as a racial slur.

Next thing you know, Mr Stein's little Huck Finn account (worth about two per cent of his entire speech) was being covered by the local press. "Political Talk Irks Fed Members" ran one headline. The story reported, among other things, a statement from the San Francisco Fed saying "Our president found the speaker's choice of words to be offensive and inappropriate for a gathering held at a Federal Reserve Bank". Other news stories wilfully misinterpreted what had happened at the speech; the topic became racial insensitivity, not free speech.

Mr McTeer apologised several times, saying, among other things that "Certain derogatory terms for racial and religious minorities are so inflammatory and offensive that they have no place in a serious policy discussion".

Readers may be able to guess the rest of the story. The press reports put Mr McTeer under a cloud. Both the administration and the House and Senate Banking Committees have publicly pressured the Fed, an institution where the proportion of white males in high positions is rather higher than that of white males in the general population, into attuning itself to issues of diversity and background. Hiring more women, blacks or Hispanics is not the only issue. Even the autonomous Fed, the message is, must also create an environment that is hospitable to diversity.

One can of course at this point note that some of this may have been Mr McTeer's fault. Perhaps he should not have hosted an event that was not explicitly economic. Or perhaps he should not have apologised. And, as Harry Stein later noted in a thoughtful article recalling his Texas visit in the Manhattan Institute's City Journal, Mr McTeer has apologised repeatedly.

Which brings us back to this week's rate cut and Mr McTeer's monetary policy victory. For those who advocate lower rates for the US, it was good economic news. But it might also have been good news in another sense: it might have shown that the little Fed controversy over the Stein speech is over. That would be a good thing. It must be possible, after all, for America to make racial and social progress without bringing political correctness into arenas where it has no place.

© Copyright 2002 Financial Times

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