Washington
On Wednesday at 2:15 p.m., Ben Bernanke will do something that previous Federal Reserve chairmen considered a terrible idea. He will hold a news conference.
Mr. Bernanke spent much of his academic career arguing that the Fed should be less opaque, and, as chairman, he has put his ideas into action. Now it’s time for those of us in the media to hold up our end of bargain. In the spirit of democratic accountability, we should ask hard questions — and we shouldn’t let him get away with the evasions and half-answers that members of Congress too often allow Fed chairmen during their appearances on Capitol Hill.
One question more than any than other is crying out for an answer: Why has Mr. Bernanke decided to accept widespread unemployment for years on end, even though he believes he has the power to reduce it?
The Fed’s own forecasts suggest that the unemployment rate won’t fall below 5 percent for perhaps another five or six years. Mr. Bernanke believes the Fed “retains considerable power” to reduce unemployment faster, despite the fact that its benchmark interest rate is zero, as he’s said before. Yet he has been hesitant to use that power.
He is in a tough spot, to be fair. Several other voting members of the Fed’s monetary policy committee — and some prominent members of Congress — oppose aggressive action, because they worry it will set off inflation. But these critics always worry about inflation. They have been wrong again and again over the last two years. More important, they don’t have enough power to keep Mr. Bernanke from pursuing the policy he thinks is best.
So the Fed’s decision to permit high unemployment for an extended period rests on his shoulders.
As he has explained many times, the Fed has alternatives. It could announce that it would keep its benchmark rate at zero for a few years, which would probably hold down long-term rates. It could say that it was comfortable with higher inflation for a limited period of time, given how low inflation has been since 2007 and how high unemployment is. Above all, Mr. Bernanke could make clear that he considers years of widespread unemployment to be unacceptable.
He has not done so, and he has yet to offer a satisfying rationale.
Instead, he has said that more aggressive action brings risks. And it does. Low interest rates have the potential to spark inflation, by enticing millions of households and businesses to borrow money and causing the economy to overheat. Higher inflation could, among other things, increase borrowing rates for the United States government and worsen the deficit.
But it’s worth keeping in mind that just about every decision involves some risk. Simply stating that more aggressive action brings risks is not a good argument against that option.
Economists sometimes like to describe choices in terms of a concept known as expected value. The expected value of a decision is the odds of each possible outcome multiplied by the benefit (or cost) of that outcome. If you make an investment that has a 90 percent of breaking even and a 10 percent chance of earning you $5,000, the expected value is $500.
Now extend this concept to the Fed’s decision. The consequences of being too aggressive and creating an inflationary spiral are undeniably serious. But the odds still appear quite low. Put the two together, and you get an expected cost that is not high enough to be dictating Fed policy.
One of the best guides to future inflation is recent core inflation — that is, inflation excluding food and energy prices, which bounce around a lot and often do not translate into big changes in other prices. Despite the uptick in core inflation, it has still risen at an annual pace of only 2 percent over the last three months. On only a few other occasions over the last 40 years has it been so low.
This shouldn’t be surprising. After all, does the economy feel as if it’s on the verge of overheating?
The expected cost of high unemployment, on the other hand, is steep. For one thing, the chances that unemployment will remain a problem are close to 100 percent. The debate is whether the country will return to full employment in four years or 10 years.
For another, the consequences of high unemployment are also awful. With fewer jobs, states and cities are short of tax revenue. Families lose their life savings. People’s health can deteriorate. For the long-term unemployed, the financial damage can be permanent. “If things go on and they simply sit at home or work very irregularly,” Mr. Bernanke himself said last year, “when the economy gets back to a more normal state, they’re not going to be able to find good work.”
Unemployment creates political problems, too. Historically, it has tended to make voters less willing to help their fellow citizens, as the economist Benjamin Friedman has written. It’s hard to imagine any grand political compromise — on the deficit, for instance — in an angry country.
Mr. Bernanke is an admirable public official in many ways. He was calmly heroic during the worst days of the financial crisis. By making the Fed more open, he has taken the rarest of steps for a political figure: voluntarily giving up some of his power.
Nonetheless, his job performance over the last year or so has been flawed. The Fed badly overestimated the economy’s strength in 2010 and took too long to correct its mistake. Despite his core belief in letting facts guide decisions, Mr. Bernanke has let himself be overly influenced by a group of colleagues who see inflation always and everywhere as a threat and unemployment as a mere nuisance.
The news conference on Wednesday offers a chance to hold him accountable. The country’s leading Fed scholar — one Ben Bernanke, formerly of Princeton — would expect nothing less.
E-mail: leonhardt@nytimes.com; Twitter.com/DLeonhardt
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