Luigi Zingales is right in one dimension – the “eliminate” one. But the choice is not between “full employment” and “price stability”, both of which are pretty vague and hard to define.
It might be too late to reverse the politicization of the Supreme Court, but Congress can still use its power to save the Fed (FDTR), namely by passing laws that restrain the central bank’s activism.
The first step would be the elimination of the double mandate. Unlike the European Central Bank, which is in charge only of price stability, the Fed has two main legislated goals: promoting full employment and promoting stable prices.
This gives the Fed too much flexibility, pushing it to substitute for the government in designing economic policy. The temptation to act in this way is particularly strong when Congress is divided and paralyzed. It is precisely this substitution that makes the Fed politically vulnerable. The central bank can be independent or activist; it cannot be both. Independent is better.
Zingales mentions the single mandate – price stability – of the ECB. But look at what happened to the EZ countries. Also, back in 2008 a major reason for the plunge in US NGDP was the FOMC´s undivided attention to the risk of inflation from the rise in oil and commodity prices.
And that´s another drawback of the “price stability” mandate: it´s badly suited to absorb supply shocks.
My take: Economic stabilization presumes NOMINAL stability, and that´s the province of the Fed. So require the Fed to have a single mandate. That being to keep nominal spending evolving along a stable growth path. Instead of an inflation target the Fed would pursue a NGDP Level Target.
And this has been unwittingly tried, with great success, for more than twenty years with the result being the “Great Moderation”, a period of low and stable inflation, stable growth and low unemployment. (And, please, don´t come charging with accusations that it bred all sorts of bubbles).
Who would want to ask for more?