What happened to the global economy and what we can do about it
with 40 comments
By James Kwak
I was on vacation last week (far from Jackson Hole) when Ben Bernanke gave his widely anticipated speech. The media (see the Times, for example) seemed to focus mainly on his criticisms of the political branches and economic policymaking, which were accurate enough. But in my opinion, Bernanke drew the wrong lessons from those observations.
He was very clear that the problem today is unemployment, not inflation:
“Recent data have indicated that economic growth during the first half of this year was considerably slower than the Federal Open Market Committee had been expecting, and that temporary factors can account for only a portion of the economic weakness that we have observed. Consequently, although we expect a moderate recovery to continue and indeed to strengthen over time, the Committee has marked down its outlook for the likely pace of growth over coming quarters. With commodity prices and other import prices moderating and with longer-term inflation expectations remaining stable, we expect inflation to settle, over coming quarters, at levels at or below the rate of 2 percent, or a bit less, that most Committee participants view as being consistent with our dual mandate.”
He even said that we are in a situation where economic would improve the economy’s long-term performance:
“Normally, monetary or fiscal policies aimed primarily at promoting a faster pace of economic recovery in the near term would not be expected to significantly affect the longer-term performance of the economy. However, current circumstances may be an exception to that standard view–the exception to which I alluded earlier. Our economy is suffering today from an extraordinarily high level of long-term unemployment, with nearly half of the unemployed having been out of work for more than six months. Under these unusual circumstances, policies that promote a stronger recovery in the near term may serve longer-term objectives as well. In the short term, putting people back to work reduces the hardships inflicted by difficult economic times and helps ensure that our economy is producing at its full potential rather than leaving productive resources fallow. In the longer term, minimizing the duration of unemployment supports a healthy economy by avoiding some of the erosion of skills and loss of attachment to the labor force that is often associated with long-term unemployment.”
But what is Bernanke going to do about it? He declined to offer any new efforts to reduce unemployment, saying only that the Fed “is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability.” And mainly he relied on the political branches to solve the country’s problems, calling not only for “good, proactive housing policies” but also for policies that would improve K"“12 education for underprivileged households and lower health care costs.
I don’t think it makes sense to criticize the political system for being dysfunctional and then rely on the political system to rescue the economy. I understand that traditional monetary policy tools don’t work that well in this environment: short-term rates can’t go any lower, and lowering long-term rates won’t make companies invest if they don’t think there is demand for their stuff. But there’s always, you know, dropping cash out of helicopters.
It’s true that, in the speech that gave Bernanke the nickname “helicopter Ben,” he was talking about a tax cut"”in other words, fiscal policy. But there’s always the option of increasing the inflation target from 2 percent to 4 percent while simultaneously buying long-term bonds to keep nominal rates from rising too much (so real rates come down). If the Fed can actually generate more inflation, that would function like a transfers from creditors to debtors, which would help solve the household balance sheet problems that are weighing down the economy. And there’s nothing magical about the number two: both Ken Rogoff and Olivier Blanchard have argued for higher inflation, given current economic circumstances. As Blanchard says, “There was no very good reason to use 2% rather than 4%. Two percent doesn't mean price stability. Between 2% and 4%, there isn't much cost from inflation.”
I’m not sure it would work; maybe even raising the inflation target wouldn’t actually increase inflation. But doing nothing is be the wrong policy conclusion to draw from Bernanke’s observations, which seem spot-on.
Written by James Kwak
August 30, 2011 at 10:27 am
Posted in Commentary
Tagged with Ben Bernanke, Federal Reserve, inflation, monetary policy
this is terrible moral hazard James: “If the Fed can actually generate more inflation, that would function like a transfers from creditors to debtors, which would help solve the household balance sheet problems that are weighing down the economy.”
Screw conservative savers, reward and bailout the profligate.
I am so sick of reading this kind of tripe.
You stay true to our current cultural/societal/economic meme. You stay true to the problem as well.
Time for this nation to grow a sack, make the tough debt deflationary choice, uphold the rule of law/contract law, severely punish fraud at all decision making change. Get venture capital together with .gov and make work creating energy efficiency infrastructure.
Or just print credit like James suggests as the economic “balm that soothes…………” and prop a system so out of balance that wishes to self immolate on its own capitalist accord.
tv
August 30, 2011 at 10:41 am
Is there a historical precedent that a nation with debts as deep as the US prints its way out of its self-inflicted economic sinkhole?
Worldobserver
August 30, 2011 at 10:50 am
you know James, someone needs to tell Bernanke that he needs to check the prices of food and clothes and tell those hard working middle to lower income people that they are just gonna have to suck it up………have you seen the price of coffee lately? i guess bernanke and the like haven’t had to suck it up in a while…….
Billy Jones
August 30, 2011 at 10:58 am
@ James, welcome back from vacation. The inflation figures from the punditry always and forever seem understated to me. Are these guys paying for their own electric consumption, heating their homes with gas in the winter, buying food at the market, or supporting teenagers?
I don’t think they are, perhaps they are living off the grid. :)
In any event, how do higher costs translate into more healthy balance sheet for a family? If I spend more on durable goods using available credit, as opposed to wanting to deplete my cash balance, wouldn’t I be booking the asset at historic cost, and booking the liability at the same time? Later, reducing my cash balance with subsequent payment of the liability, and seeing the liability diminish over time?
Woop
August 30, 2011 at 11:04 am
@Worldobserver – yes, as a matter of fact, Rudolf Havenstein gave us an awesomely clear example in the 1920′s.
@tv – Right on for linking deflation, law, integrity and infrastructure so concisely and well. Then again, for all I know I might have been one of the yahoos cheering Rudy’s printing presses.
paul
August 30, 2011 at 12:38 pm
James — The real problem for economists and others is "understanding" by the public. Most of the comment writers here do not even understand it. We have become such a stuck-on-ourselves nation and " _ our neighbor" that a person cannot even use their own name to say what I am saying — right now. When we as a people no longer have trust and compassion, then what do we have as a nation? I blame it on our education system that does not encourage intellectual thought, but sensationalism through the media so people do not learn to question, discuss, and find true solutions.
We will not get out of this recession with fear and hate.
We will not get out of this recession with Businesses who will not pay their people more and think of them as extensions of their equipment. It is places like this that fear the future. They have already learned their survival does not depend on paying their people more so the employee can spend more to buy the businesses goods "“ they can make a profit from those customers they have without new ones.
As for inflation, we will have all we want from the outside soon enough as lesser economies with more people buy more and compete for resources. But, inflation here will mean nothing as we are a divided nation and people will end up spending less because the inflation will not go to increase wages just cost of goods.
Thus, from the above observations, few, from the top down in government and academia, can think about doing what is right for the common good of all as it would get labeled as socialism even though it would preserve individual rights and freedoms more in the long run.
anonymous
August 30, 2011 at 12:43 pm
The problem is, the Fed hasn’t succeeded in creating “good inflation” — rising wages and job growth. It has only succeeded in generating “bad inflation” — higher commodity prices — with its money printing policies. I don’t even bother reading the empty, ridiculous claims that QE2 had nothing to do with driving up the cost of crude oil, copper, aluminum, sugar, corn, wheat, soybeans, gold, silver, and every other commodity under the sun (except for nat gas! :) any more. The evidence is incontrovertible.
Why anyone could seriously ask for more QE is beyond me. I think it’s high time we stop doing the same thing over and over again (QE) in the expectation it will generate different results. Wasn’t it Einstein who called that the definition of insanity?
Mike
August 30, 2011 at 1:09 pm
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