Ben Bernanke: Interest Rate Critics Wrong
Washington — Federal Reserve chairs are experts at being boring.
They use words like “moderate,” “uncertain,” or “stability” like we use the words “um,” “and,” or “but.” It’s, as former Fed Chair Alan Greenspan put it, a “language of purposeful obfuscation” that drones on so long you forget what was just asked, let alone whether this answered it, just as long as it’s mercifully over. But now that he’s free of the strictures of office, former Fed Chair Ben Bernanke is telling his critics who say the Fed has been trying to do too much what he thinks about them in the most direct way possible: that they’re very, very wrong.
First, there’s the Wall Street Journal editorial page kind of wrong. They’ve argued that since the Fed has been wrong about how strong the recovery would be, it’s also wrong about zero interest rates helping the recovery at all. This is a theory that, to be clear, goes against all economic experience. It says that raising rates would boost growth, and keeping them low would only boost inflation — never mind that more inflation would mean more growth when households still have so much debt left over.
So it’s not only incoherent, but also un-self-aware. “It’s generous of the Wall Street Journal writers to note,” Bernanke says, “that ‘economic forecasting isn’t easy,’ ” since “they should know” after “forecasting a breakout in inflation and a collapse in the dollar at least since 2006.”
But more than that, the problem is the Wall Street Journal’s apparent belief that since, as Bernanke describes it, “monetary policy has not been a panacea for our economic troubles, we should stop using it.” Instead, he says, “the right inference is not that we should stop using monetary policy, but rather that we should bring other policy tools to bear as well” — like infrastructure spending.
Then there’s the John Taylor kind of wrong. He’s the economist who came up with the, you guessed it, Taylor rule that ballparks where the Fed should set rates based on how much inflation and how much slack there is in the economy. He blames the housing bubble on the Fed setting rates lower than his rule said they should have from 2003 to 2005, and blames the slow recovery on them once again setting rates lower than they should have since 2010. (If it doesn’t make sense how too-low rates could overheat and cool off the economy, don’t worry, it doesn’t).
This, out of the process of elimination, has become conservatives’ go-to critique of the Fed. Indeed, Republicans have gone so far as to push a bill that would force the Fed to follow a mathematical rule like Taylor’s, and explain why they ever deviated from it.
It doesn’t make a whole lot of sense, though. If the Taylor rule really is good at telling us where rates should be, then it shouldn’t be a big deal if rates are close to it, but not exactly at it, like they were from 2003 to 2005. The fact that it was a big deal, though, tells us that either the Taylor isn’t that good a guide or that other things, like lax to nonexistent regulation, were more to blame for the bubble.
Well, make that the original Taylor rule. As Bernanke explains, there are a lot of tweaks you can make. You can use different measures of inflation, put different weights on unemployment, or only use realtime data that policymakers could have looked at. And if you do all those things, you’ll do what the Fed has done — it explains all their decisions — which means that it hasn’t strayed from rules-based policy like Taylor says it has. But does that mean, as Bernanke puts it, that “we’ll be replacing the FOMC with robots soon” that just use a formula to mechanically set rates?
No. We still need people to figure out how much higher unemployment is than it “should” be, how much weight we should put on higher unemployment versus higher inflation, and how high rates should “normally” be now that the population is aging and growth is slowing down. Discretion, in other words, is the greater part of monetary policy valor.
But really, you just have to say one word to show that the Fed’s hard money critics are wrong. That’s “Europe.” Or, if you prefer, “Sweden.”
Both the eurozone and Sweden raised rates in 2010 and 2011, like hawks wanted, because they thought that they had their recoveries well in hand and inflation was more of a problem. They were wrong. Their economies either stalled out or stumbled back into recession that have now forced them to cut rates even lower than before, down to -0.25 percent, and start buying bonds with newly printed money.
So if higher interest rates were going to help growth, they’d have helped growth. But they didn’t. They did the opposite, just like standard economics would have told you.
Now, it’s important to point out why people who want higher rates for the sake of higher rates are wrong, but it’s also important to point out what’s still wrong about the economy. Bernanke is a little too sanguine when he says that “the relatively rapid decline in unemployment in recent years shows that the critical objective of putting people back to work is being met.”
There’s still a lot of shadow unemployment — people who have either given up looking for a full-time job or can only find a part-time one — which is clear enough, as Brad DeLong points out, if you look at how many fewer people between the prime working years of 25 and 54 are actually working or even looking for work. Those are people who, for the most part, are too old to still be in school and too young to be retired, but aren’t in the labor force as much as before.
It’d be more interesting, in other words, to hear what Bernanke has to say to people who think the Fed should have done more.