The lackluster U.S. economic recovery has fueled an unusually public argument between two of the most prominent economists in the country: Nobel prize-winning New York Times columnist Paul Krugman has accused Fed Chairman Ben Bernanke of not doing enough to help spur the economy. Bernanke has responded by pointing out that the Fed has already acted aggressively through two rounds of monetary stimulus and, in any event, has a responsibility to help maintain “price stability,” something that could be jeopardized by raising the target inflation rate, which Krugman advocates. Academic jargon aside, the dispute underscores the mounting frustration among pundits and policy-makers alike, caused by slowing economic growth and continued high unemployment.
Krugman, for one, is clearly frustrated, as suggested by the title of his new book, “End This Depression Now!“, which goes on sale today. Krugman’s basic argument, one that he’s made for years, is that the U.S. government needs to do more — including spend more money — in order to spur the economy and help create jobs. Recent weak economic data has only emboldened Krugman, who greeted last Friday’s lackluster GDP figure in slightly sarcastic fashion. “Disappointing GDP number — we’re not growing fast enough to make any significant headway on reducing the output gap — but hey, no need for further Fed action,” he wrote on his blog.
Krugman launched his broadside against Bernanke in a recent Times article in which he accused the central banker of betraying his earlier academic support of aggressive central bank action. In particular, Krugman points to Bernanke’s earlier work criticizing Japan’s central bank for not moving assertively enough to address that country’s economic slump in the 1990’s. Bernanke’s current stance is not consistent with his past position, according to Krugman, who offers a few possible explanations:
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.
Krugman acknowledges that Bernanke’s policy options are limited, particularly because the Fed has already pushed interest rates close to zero to spur lending, reaching what economists call the zero lower bound. Krugman zeroes in on yet another policy option: raising the target rate of inflation from the current 2%, something anathema to increasingly vocal inflation hawks.
“Higher expected inflation would aid an economy up against the zero lower bound,” Krugman wrote, “because it would help persuade investors and businesses alike that sitting on cash is a bad idea.” Taking this money off the sidelines, in Krugman’s view, would increase economic activity, helping to create jobs. Krugman pointed out that in 2000, Bernanke endorsed the idea for Japan by suggesting that its central bank declare 3-to-4% target inflation range for inflation.
This is where Bernanke pushed back against Krugman, during a recent press conference in which he called criticism that his current position isn’t consistent with his past writing, “absolutely incorrect.” In particular, Bernanke pointed out that unlike Japan, the U.S. is currently not grappling with deflation, or falling prices, which made more aggressive action appropriate in Japan’s case.
“To actively seek a higher inflation rate in order to achieve a slightly increased pace of reduction in the unemployment rate…would be very reckless,” Bernanke said. “We’ve been able to take strong accommodative actions in the last four or five years to support the economy without leading to a…destabilization of inflation. To risk that asset, for, what I think would be quite tentative and perhaps doubtful gains…would be an unwise thing to do.”
Krugman hit back, writing that Bernanke all but admitted that he has “been assimilated by the Fed Borg,” which is Krugman’s geeky way of saying that Bernanke has forsaken his earlier academic aggressiveness, and become a conventional central banker whose top priority is the Fed’s institutional standing. “It’s basically an assertion that we’re doing all right, maybe could do a bit better, but not worth endangering the Fed’s reputation — oh, and as long as we don’t have actual deflation, no problem,” Krugman wrote.
Perhaps this debate can be chalked up to the different roles that these two world-famous economists occupy. Krugman is a newspaper columnist: It’s his job to be provocative and spur debate. Unlike Bernanke, he doesn’t face the institutional responsibility of running the world’s most important central bank. If Krugman sees a difference between Bernanke’s academic writing and his current posture, maybe that’s because Bernanke is no longer an academic, free to lob rhetorical missiles toward policy-makers, which happens to be precisely what Krugman is doing. On the other hand, Krugman is right to feel frustrated at the pace of economic recovery, and question whether there isn’t a way for policy-makers to do more.
Unfortunately for the country, with just over 6 months remaining before the presidential election, political concerns are now paramount among our nation’s leaders, which reduces the likelihood of aggressive Fed action. In a way, the Krugman vs. Bernanke debate symbolizes one of the great narratives of President Obama’s first term: What happens when bold ideas run smack into the responsibility — and political considerations — of actually governing, and maintaining public support to continue doing so.