Binyamin Appelbaum recently made that following claim:
It’s worth reading the entirety of this response from the Federal Reserve chairman, Ben S. Bernanke, to a question I raised at a news conference on Wednesday. It’s a very clear statement of his views on what is probably the most important current question of economic policy: Why won’t the Fed do everything in its power to reduce unemployment?
Actually, it’s as clear as mud. Let’s start with what we know for a fact:
- If the Fed never aims for an inflation rate that is higher or lower than 2%, then it’s an inflation targeter.
- If the Fed had a single mandate to produce 2% inflation, with no regard for unemployment, then it would not have a dual mandate.
- The policies described in points one and two are identical. Two policy regimes that call for exactly the same policy in 100% of all cases are actually a single policy regime, perhaps with two names. That which has no practical implications, has no theoretical implications.
- Ben Bernanke has repeatedly emphasized that he supports the dual mandate, and puts equal weight on both components of that mandate.
- Because of points 3 and 4, we know for a fact that Ben Bernanke does not support a 2% inflation target on all occasions.
- Bernanke’s response to Binyamin’s question seemed to suggest he supports a 2% inflation target under all circumstances. But we know that is not true, hence there is nothing “clear” about Bernanke’s response.
Now let’s talk about what we don’t know for sure, but seems likely:
- Bernanke has indicated in the past that policy may need to aim for more or less than 2% inflation over the short run, with the proviso that the Fed would gradually bring inflation back to 2% in the longer run. (BTW, this occurs when AS problems lead to above 2% inflation despite economic slack. With no AS problems, inflation targeting is all you need.)
- He’s suggested that the Fed might need to temporarily shoot for slightly higher than 2% inflation when unemployment is high, and vice versa.
- We also know that the Taylor Rule, which almost everyone seems to believe was roughly the Fed’s approach during the Great Moderation, calls for slightly higher than 2% inflation during periods of high unemployment, and vice versa.
- Putting these three points together, it seems overwhelmingly likely that Bernanke would prefer slightly above 2% inflation during periods of high unemployment, and slightly below 2% inflation during periods of low unemployment.
So why didn’t he say so? Now we need to get even more speculative:
1. One possibility is that this answer should be seen as a response to Krugman’s argument that we should not just aim for slightly higher than 2% inflation in the short run, but should actually raise the long term inflation goal to something like 4%, in order to lower real interest rates, and also to make liquidity traps less likely. Bernanke probably sincerely opposes that policy, but that doesn’t mean he wouldn’t prefer to see a bit more NGDP growth and inflation right now.
So why didn’t he make both points, why not say he wants a bit more inflation right now, but also wants to keep the Fed’s long term 2% inflation target? I can think of several reasons:
- In late 2010 he ran into a firestorm when he called for higher inflation. At the time he was merely calling for boosting core inflation up from 0.6% to 2.0%, which should have been incredibly uncontroversial—even the hawks should have applauded. Now imagine he says “we are going to try to push inflation a bit above 2%.” That actually is the implication of the dual mandate, but nonetheless all hell would break lose. I think he might honestly believe that it could be a setback for the doves. He’d rather move quietly in that direction.
- A Fed Chairman, like virtually all top officials in government, is essentially forced to defend the policy of the institution they head. Or resign. He probably feels he can do more good from the inside than the outside. Some people complain that I am being too charitable to Bernanke. Actually, I’ve had lots of exactly the sort of highly critical posts that others have provided. But let’s get real for a moment. There are numerous press reports from journalists with access, like Jon Hilsenrath, that paint a clear picture of Bernanke being a dove who is constantly trying to nudge the Fed in a more expansionary direction. All the Fed actions (QE1, QE2, Operations Twist, the 2014 low rate promise, etc, were things that Bernanke came up with, and pressured the Fed to adopt. There’s absolutely no reason to think the picture painted by these well-informed journalists is wrong.
- In the previous press conference there were two pointed questions that basically criticized the Fed for not doing more. And both times Bernanke answered something to the effect that “no one can deny we’ve been extraordinarily accommodative, blah, blah, blah, but your point is well taken, the economic data do suggest reason for even more stimulus. It’s under active consideration.” That’s from memory, not exact words. Now take a look at the exact words in this recent conference:
Likewise, we have been aggressive and creative in using non-federal-funds-rate-centered tools to achieve additional accommodation for — for the U.S. economy. So the — 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. The policy is extraordinarily accommodative. We — and I won’t go through the list again, but you — you know all the things that we have done to try to provide support to the economy.
Here’s how I translate that:
“Give me a break Paul; you know I can’t throw my colleagues under the bus at a public press conference. But I’ve worked really hard to persuade them to do one unconventional move after another. And I’m still working for additional accommodation later this year. But we don’t live in a perfect world; it’s much harder to lead a big institution like the Fed than take pot shots from a NYT column.”
Just to be clear, I agree with Krugman’s criticism of the Fed. And I can even agree with his specific criticism of Bernanke in one sense. Just as Bernanke is almost forced to defend polices that may not be 100% optimal in his eyes, a journalist is duty-bound to criticize the public statements of government officials—regardless of what they think the official privately believes. I’ve also criticized Bernanke.
Free Exchange has an anti-Bernanke piece by Ryan Avent and a pro-Bernanke piece by Greg Ip. Both are excellent, and in a sense both are correct. They are simply looking at the picture from a different perspective.
Without the criticism of Bernanke from us market monetarists, and without the criticism of Bernanke from Krugman, DeLong, Avent, Yglesias, Duy, Thoma, etc, etc, Ben Bernanke’s job would be much harder. Without that criticism, all the pressure on the Fed would be coming from the right, and would be pushing the Fed in exactly the opposite direction from where Bernanke would like to go. We are helping him, whether he knows it or not, and regardless of how annoying he finds our criticism.