Bernanke’s Perry Problem
By PAUL KRUGMAN, NY Times, August 26, 2009
As I write this, investors around the world are anxiously awaiting Ben Bernanke’s speech at the annual Fed gathering at Jackson Hole, Wyo. They want to know whether Mr. Bernanke, the chairman of the Federal Reserve, will unveil new policies that might lift the U.S. economy out of what is looking more and more like a quasi-permanent state of depressed demand and high unemployment.
But I’ll be shocked if Mr. Bernanke proposes anything significant — that is, anything likely to make any serious dent in unemployment or offer any serious boost to growth.
Why don’t I expect much from Mr. Bernanke? In two words: Rick Perry.
O.K., I don’t mean that Mr. Perry, the governor of Texas, is personally standing in the way of effective monetary policy. Not yet, anyway. Instead, I’m using Mr. Perry — who has famously threatened Mr. Bernanke with dire personal consequences if he pursues expansionary monetary policy before the 2012 election — as a symbol of the political intimidation that is killing our last remaining hope for economic recovery.
To see what I’m talking about, let’s ask what policies the Fed actually should be pursuing right now.
Obviously, the U.S. economy remains deeply depressed, and under normal conditions we would expect the Fed to pump it up by cutting interest rates. But the interest rates the Fed normally targets — basically rates on short-term U.S. government debt — are already near zero. So what can the Fed do?
Well, in 2000 an economist named Ben Bernanke offered a number of proposals for policy at the “zero lower bound.” True, the paper was focused on policy in Japan, not the United States. But America is now very much in a Japan-type economic trap, only more acute. So we learn a lot by asking why Ben Bernanke 2011 isn’t taking the advice of Ben Bernanke 2000.
Back then, Mr. Bernanke suggested that the Bank of Japan could get Japan’s economy moving with a variety of unconventional policies. These could include: purchases of long-term government debt (to push interest rates, and hence private borrowing costs, down); an announcement that short-term interest rates would stay near zero for an extended period, to further reduce long-term rates; an announcement that the bank was seeking moderate inflation, “setting a target in the 3-4% range for inflation, to be maintained for a number of years,” which would encourage borrowing and discourage people from hoarding cash; and “an attempt to achieve substantial depreciation of the yen,” that is, to reduce the yen’s value in terms of other currencies.
Was Mr. Bernanke on the right track? I think so — as well I should, since his paper was partly based on my own earlier work. So why isn’t the Fed pursuing the agenda its own chairman once recommended for Japan?
Part of the answer is internal dissension. Two weeks ago, the committee that sets monetary policy declared that conditions “are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013” — that is, it didn’t even promise to keep rates low, it just offered an observation about what the state of the economy is likely to be. Yet, even so, the statement faced serious internal opposition, with three inflation hawks on the committee voting against it and calling it a mistake.
The larger answer, however, is outside political pressure. Last year, the Fed actually did institute a policy of buying long-term debt, generally known as “quantitative easing” (don’t ask). But it faced a political backlash out of all proportion to its modest effect on the economy, culminating in Mr. Perry’s declaration that any further monetary easing before the 2012 election would be “almost treasonous,” and that if Mr. Bernanke went ahead and did it, “we would treat him pretty ugly down in Texas.”
Now just imagine the reaction if the Fed were to act on the other and arguably more important parts of that Bernanke 2000 agenda, targeting a higher rate of inflation and welcoming a weaker dollar. With prominent Republicans like Representative Paul Ryan already denouncing policies that allegedly “debase the dollar,” a political firestorm would be guaranteed.
So now you see why I don’t expect any substantive policy announcements at Jackson Hole. Back in 2000, Mr. Bernanke accused the Bank of Japan of suffering from “self-induced paralysis”; well, now the Fed is suffering from externally induced paralysis. In effect, it has been politically intimidated into standing by while the economy stagnates. And that’s a very, very bad thing.
Political opposition has already crippled fiscal policy; instead of helping to create jobs, the federal government is pulling back, acting as a drag on output and employment.
With the Fed also intimidated into inaction, it’s hard to see any end to the ongoing economic disaster.