Ben Bernanke, Paul Krugman and the reality of responsibility


Slowing Growth Stirs Recovery Fears

Weaker Business Investment Weighs on Economy in First Quarter Despite Brisk Consumer Spending

By Ben Casselman | Updated April 28, 2012, 12:52 AM ET

The economy lost steam in the first quarter, as onetime engines of growth sputtered and robust consumer spending was unable to propel the recovery on its own.

Gross domestic product, the broadest measure of all goods and services produced in the economy, grew at an annualized rate of 2.2% in the first quarter, down from 3% at the end of 2011, the Commerce Department said Friday. The deceleration reflected sharp cutbacks in government spending and weaker business investment and came despite an unusually warm winter, which many economists said likely provided a mild economic boost.

The report did reveal a few areas of strength. Consumer spending, by far the biggest piece of the economy, accelerated in the first quarter, and the moribund housing sector also showed signs of improvement. Overall economic growth, though modest, was far stronger than at the start of last year, when the U.S. teetered on the brink of recession.

The glum economic news had a muted impact on financial markets, in part because many investors see a weakening economy as increasing pressure on the Federal Reserve to step in with a new round of stimulus. The Dow Jones Industrial Average nosed up 23.69 points to 13228.31. There was a note of caution in the bond market, where surging demand for the perceived safety of Treasurys sent 10-year bond yields to their lowest level in two months.

Whether the Fed will try to provide more stimulus is a guessing game, but another WALL STREET JOURNAL article suggests it is unlikely:

With the QE3 debate in full swing, today’s GDP report wasn’t a game changer one way or the other for the Fed.

A slew of analysts and strategists have changed their tune this week following the Fed statement and press conference. More folks don’t necessarily believe another round of massive Fed stimulus is in the offing, unless economic conditions significantly deteriorate from current levels.

Based on this morning’s GDP data, there’s a growing feeling that growth isn’t great, but the economy is muddling along just enough that it doesn’t necessarily need another big boost from Fed.

If there is a “growing feeling that growth isn’t great, but the economy is muddling along just enough that it doesn’t necessarily need another big boost from Fed,” that feeling isn’t shared by Paul Krugman, a Nobel Prize winning economist and columnist for The New York Times. Dr Krugman began this week’s economic kerfuffle with an article in The New York Times Magazine:1

Earth to Ben Bernanke: Chairman Bernanke Should Listen to Professor Bernanke

By | Published: April 24, 2012

When the financial crisis struck in 2008, many economists took comfort in at least one aspect of the situation: the best possible person, Ben Bernanke, was in place as chairman of the Federal Reserve.

Bernanke was and is a fine economist. More than that, before joining the Fed, he wrote extensively, in academic studies of both the Great Depression and modern Japan, about the exact problems he would confront at the end of 2008. He argued forcefully for an aggressive response, castigating the Bank of Japan, the Fed’s counterpart, for its passivity. Presumably, the Fed under his leadership would be different.

Instead, while the Fed went to great lengths to rescue the financial system, it has done far less to rescue workers. The U.S. economy remains deeply depressed, with long-term unemployment in particular still disastrously high, a point Bernanke himself has recently emphasized. Yet the Fed isn’t taking strong action to rectify the situation.

The Bernanke Conundrum — the divergence between what Professor Bernanke advocated and what Chairman Bernanke has actually done — can be reconciled in a few possible ways. Maybe Professor Bernanke was wrong, and there’s nothing more a policy maker in this situation can do. Maybe politics are the impediment, and Chairman Bernanke has been forced to hide his inner professor. Or maybe the onetime academic has been assimilated by the Fed Borg and turned into a conventional central banker. Whichever account you prefer, however, the fact is that the Fed isn’t doing the job many economists expected it to do, and a result is mass suffering for American workers.

More at the link. Dr Krugman believes that Dr Bernanke and the Federal Reserve Board of Governors should do more to stimulate the economy. And perhaps they’d like to, but their primary weapon, lowering interest rates, has already been expended: current interest rates are so close to zero right now that they cannot be lowered in any practical sense. Dr Krugman noted that, in a technical sense, they could be, but at that point, an investor would make more money by putting his money in a safe and doing absolutely nothing; that would be more profitable than buying bonds, in that the investor would, at least, not lose money.

Dr Krugman then went on to note a scholarly work by Dr Bernanke, when he was still a professor of economics at Princeton, which noted the Japanese economic problems of the 1990s, where real estate values had plummeted and the central Bank of Japan had already exhausted the interest rate weapon.

Bernanke had some specific proposals that could serve as advice for the Fed today. One set of options would have it take a larger role in financial markets. Short-term interest rates may be zero, unable to go lower, but longer-term rates aren’t. So the Fed, which typically buys only short-term U.S. government debt, could expand its portfolio, buying long-term government debt, bonds backed by home mortgages and so on, in an effort to drive down the interest rates on these assets. This is the strategy that has come to be known, unhelpfully, as quantitative easing.

Unhelpfully? :) Perhaps the esteemed Dr Krugman has forgotten: mortgage-backed securities, bundled as an economic investment, are a significant part of the problem which led to the late 2008 collapse, when the housing bubble burst. And weakness in housing sales is a significant part of the continuing slow-growth cycle; when houses don’t sell, mortgages are not written.

However, Dr Krugman noted that these things have already been tried! They just haven’t been tried to the extent that Dr Krugman believes they should have been. The Fed has bought over $2 trillion in longer-term government bonds and bonds of government-backed housing agencies, which Dr Krugman said was “much less than most analysts think necessary to jump-start economic recovery.” However, the Gross Domestic Product of the entire country for 2011 was $15.094 trillion, which means that the Fed has taken actions equal to a seventh of the entire American economy.

Dr Krugman continues to tell us that there is no real reason for the Fed to take further action, and suggested that the Fed could suggest that it was looking at 4% inflation as a target rather than 2%; that’s something the Fed is loath to do. Dr Krugman said:

So the Fed doesn’t think there are good reasons for high unemployment and isn’t worried about inflation. Indeed, the minutes from the January meeting of the Federal Open Market Committee, which sets monetary policy, revealed that a majority of members expected an eventual fall in unemployment to below 6 percent, with inflation remaining low.

Really? If that is the case, why should the Fed take any action? Assuming Dr Krugman’s statement is an accurate reflection of what the Board of Governors believe, then the Board believe that the economy will correct itself . . . which is exactly what your Editor has been saying all along.

Dr Krugman believes that action is required, and that inaction is dangerous:

I suspect that the old Bernanke would have scoffed. He would have pointed out that the Fed could still keep inflation within bounds — that 4 percent inflation (which is what we actually had during the late years of the Reagan administration) need be no more unsettling than 2 percent inflation. He would also, I suspect, have argued that the risks of losing credibility pale beside the risks of inaction.

Leaving aside Dr Krugman’s attempts at reading the mind of Dr Bernanke years in the past, I would point out, as I have many times previously, if you have the power to take an action, but choose not to do so, it is an action nevertheless, it is a choice to let events proceed as they were going to proceed without interference. If a majority of the governors believe that there will be an eventual fall of unemployment to below 6%, and inflation will remain low, the “action” of doing nothing still leads to the economy repairing itself.

But it was Dr Krugman’s very next sentence which struck me as the most foolish:

Bear in mind, whenever someone invokes the specter of a return to ’70s-style stagflation, when the economy is weak and inflation is high — a greatly overrated risk — that what we are going through now is much, much worse than anything that happened in the ’70s.

Your Editor was graduated from the University of Kentucky in 1977, and remembers those times quite well. If college graduates are having difficulties finding decent jobs in the fields for which they thought they had prepared today, the same was true in the late 1970s. If unemployment is too high today — 8.2% is the current official rate — the rate in March of 1975 was higher, at 8.6%.2 Unemployment started to decline in the late 1970s, reaching a low of 5.6% in May of 1979, but started rising again, to 7.5% on election day of 1980, which helped to retire President Jimmy Carter four years earlier than he had planned. Inflation was high, reaching 13.3% in 1979. Interest rates were very high, with the prime rate topping out at an unprecedented 21.5% in December of 1980. By the numbers, our economy today is not “much, much worse than anything that happened in the ’70s,” but is actually better. Unemployment needs to come down, but unemployment is already decreasing, albeit slowly, as the economy adjusts itself, but inflation is not a problem and interest rates remain very low.

Job creation requires a perceived increase in demand from consumers for products, which leads prospective investors and entrepreneurs to take risks to provide new production to meet the perceived increase in demand. Investment necessarily involves risk, and the higher the interest rate that must be paid to get a start up or expansion of business going, the greater the risk that the increased production will not be able to cover the expenses of getting it started. Dr Krugman believes that we must do something to get job creation stimulated, but the very things he is advocating increase the risk of inflation, and a concomitant increase in interest rates, the things which dampen both consumer demand (as more of the consumers’ dollars have to go to pay for the things they already purchase) and the ability of the private sector to see a reasonable return on investment and take the risk of creating new jobs.

The last page of Dr Krugman’s article3 leave economics, and delve into a personal attack style of politics. Dr Bernanke, he asserts, has been cowed by political bullying from the right and the Chairman having been assimilated into the Borg-like hive mind of groupthink at the Federal Reserve. It seems as though Dr Krugman is disappointed that his good friend from academia isn’t behaving as a good friend from academia ought to behave.

Your Editor suggests that there is something else involved. When Dr Bernanke wrote his assessment of Japan’s economic troubles in the 1990s, he was a Professor of Economics, and chairman of the department, at Princeton University. That is a prestigious position to be sure, but in that position, Dr Bernanke was not actually responsible for the results of the policies he advocated, just as Dr Krugman is not today responsible for the effects of the policies he advocates. Today, as Chairman of the Federal Reserve Board of Governors, Dr Bernanke is responsible for the actions of the Fed, their success and their failure. A university professor or a New York Times columnist can run his mouth in just about any way he wishes,4 and it really doesn’t matter; if he gets something wrong, there are no consequences, to him or to others. If the Federal Reserve Board gets something wrong, thousands or even millions of people could lose their jobs or lose their savings or lose their homes.

Responsibility has a way of sobering people, and a way of making liberals into conservatives. Dr Krugman has been frustrated that policymakers, that people in positions which do have actual authority and responsibility, just haven’t been listening to him. He might like to blame evil right-wing Republicans in the United States, but the European democracies, battling a major debt crisis themselves, yet whose conservatives are at least as liberal as American Democrats, have taken the same, conservative economic paths that are argued for by American conservatives. The path that Dr Krugman advocates, more borrowing, more stimulus, just plain did not meet the goals the President Obama said the 2009 stimulus plan would achieve, and are, at bottom, responsible for the looming debt crisis in the United States, and no-longer-looming but actually present debt crisis in Europe. The democracies on both sides of the Atlantic have lived beyond the means justified by their production for so long that the opportunity to try Keynesian economics has been lost: the effects of additional borrowing are so severe that there is no reasonably perceived gain which would result in bettering our economy or society.


  1. Ezra Klien of The Washington Post and George Stephanopoulos of ABC News are writing about it as well.
  2. The reader will have to plug in the dates for which he wishes the statistics.
  3. It is four pages long in the internet version. Note here that if you are not a subscriber to The New York Times, you are limited to accessing ten free articles per calendar month, but the month is almost over.
  4. Any politically correct way, that is.

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