I spent my first year at The Washington Post sitting about 10 feet away from Binyamin Appelbaum. It was a great learning experience. Appelbaum, who is now at the New York Times, doesn’t ask questions so much as he springs traps. And he sprung one on Federal Reserve Chairman Ben Bernanke at a press conference on Wednesday.
Unemployment is too high, and you said you expect it to remain too high for years to come. Inflation is under control, and you say that you expect it to remain under control. You say that you have additional tools available for you to use, but you’re not using them right now. Under these circumstances, it’s really hard for a lot of people to understand why you are not using those tools right now. Could you address that? And specifically, could you address whether your current views are inconsistent with the views on that subject that you held as an academic?
That last line was a reference to a New York Times Magazine article by Paul Krugman exploring “The Bernanke Conundrum — the divergence between what Professor Bernanke advocated and what Chairman Bernanke has actually done.” Bernanke’s response to Appelbaum was perhaps his clearest statement on why Bernanke, and the Federal Reserve, aren’t doing more. It’s worth quoting at length:
There’s this view circulating that the views I expressed about 15 years ago on the Bank of Japan are somehow inconsistent with our current policies...the very critical difference between the Japanese situation 15 years ago and the U.S. situation today is that Japan was in deflation. And clearly, when you’re in deflation and in recession, then both sides of your mandate, so to speak, are demanding additional accommodation. In this case, we are not in deflation. We have an inflation rate that’s close to our objective.
Now, why don’t we do more? Well, first, I would again reiterate that we are doing a great deal -- policies extraordinarily accommodative; we -- and I won’t go through the list again, but you know all the things that we have done -- to try to provide support to the economy.
I guess the question is, does it make sense to actively seek a higher inflation rate in order to achieve a slightly increased pace of reduction in the unemployment rate? The view of the committee is that that would be very reckless. We, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation, which has proved extremely valuable in that we’ve been able to take strong accommodative actions in the last four or five years to support the economy without leading to an unanchoring of inflation expectations or a destabilization of inflation. To risk that asset for what I think would be quite tentative and perhaps doubtful gains on the real side would be, I think, an unwise thing to do.
“As I see it, in effect he declared that he has been assimilated by the Fed Borg,” Krugman wrote in his blog Wednesday after Bernanke’s press conference.
I disagree. I don’t think we really know what the Fed chief is saying.
Bernanke is making two arguments here. First, he’s saying that the situation in the United States isn’t as bad as it was in Japan. “We are not in deflation.”
And that’s true. But things are still very, very bad. The Fed is failing to maintain full employment. That is to say, it’s failing to fulfill one part of its dual mandate. I’ll quote Charles Evans, president of the Chicago Federal Reserve, on this point : “When unemployment stands at 9%, we’re missing on our employment mandate by 3 full percentage points. That’s just as bad as 5% inflation versus a 2% target. So, if 5% inflation would have our hair on fire, so should 9% unemployment.”And as Krugman points out, Bernanke’s commentaries on Japan were not restricted to combatting deflation.
Bernanke’s real argument, I think, is embedded in the language he uses here: “Does it make sense to actively seek a higher inflation rate in order to achieve a slightly increased pace of reduction in the unemployment rate?”
The way he asks the question essentially answers it. Bernanke thinks that the best he could do is “a slightly increased pace of reduction in the unemployment rate.”
This is really an issue, in other words, of models: In your model of monetary policy, how many more jobs does the economy produce at three percent inflation rather than two percent inflation? What about four percent inflation?
In Bernanke’s model, the answer is “not many.” Or, more precisely, it’s “not enough to be worth it.”
But it would be nice to see this argument conducted in more precise terms. What does Bernanke actually think the Federal Reserve could do if it tried to juice the recovery? What do his critics think the Federal Reserve could do if it tried to juice the recovery? In other words, do Paul Krugman and Ben Bernanke disagree on the number of jobs the Fed could create, or do they disagree on whether creating those jobs would be worth the cost in higher inflation expectations?
Brookings Institution senior fellow Sarah Binder also watched Bernanke’s press conference, and she warns us to keep our eyes on the institution, not just the chairman:
It’s important to remember that for all the criticism directed at Bernanke, he is to some degree (albeit tough to measure) constrained by the views of the (largely) privately appointed reserve bank presidents. The influence of the bank presidents in fact is slightly increased in recent years given the two vacancies on the Fed’s Board of Governors. (If filled, those two governors would presumably give Bernanke two more supportive votes.) And as the economic projections suggest, the FOMC as a whole is more hawkish than the voting members of the committee this year.
Bernanke today justified the Fed’s reluctance to do more for the economy on macroeconomic grounds. But the political scientist in me suspects that Bernanke is reluctant to push the Fed to do more on its employment mandate given the risk of a more vocal dissent from within the FOMC. That in turn would raise doubts about the Fed’s future policy stance. All that said, Bernanke also argued that the committee would consider efforts to seek higher inflation so as to more quickly lower unemployment “very reckless.” In doing so, he clipped the wings of any FOMC doves who might have favored such easing.
Much more from Binder here. President Obama’s failure to fill the open seats on the Federal Reserve Board when he had 60 votes in the Senate is likely to go down as one of his costlier mistakes.