Give and Take

I wonder if former Federal Reserve chairman Ben Bernanke is enjoying blogging?

It’s nice to know we’re being read, and Thursday’s editorial on “The Slow-Growth Fed” sure got a rise out of Ben Bernanke. The former Federal Reserve Chairman turned blogger turned Pimco adviser wrote to defend the central bank and by implication his policies as innocent of responsibility for subpar economic growth.

This is fun, so let’s parse the Revered One’s arguments. First, Mr. Bernanke accuses us of “forecasting a breakout in inflation” at least since 2006. The central banker is getting into the polemical swing, but he’s wild with that one. We’re not always right. But we’ve been careful not to join some of our friends in predicting inflation from the Fed’s post-crisis policies. We’ve written that we are in uncharted monetary territory with risks and outcomes we lack the foresight to predict.


Mr. Bernanke defends the Fed’s over-optimistic economic growth forecasts by saying the central bank has been overly pessimistic about unemployment. “The relatively rapid decline in unemployment in recent years shows that the critical objective of putting people back to work is being met,” Mr. Bernanke writes.

Now, that’s over-optimism. One reason the jobless rate has fallen to 5.5% is because so many people have left the workforce. The labor participation rate has plunged to 1978 levels during this supposedly splendid expansion. Most economists acknowledge that if the participation rate had stayed constant, the jobless rate would still be close to 8%. The failure to attract the long-term unemployed into the job market is one reason the Fed continues to hold interest rates so low.

Mr. Bernanke’s other defense is the counterfactual that it could have been worse: “It seems clear that the Fed’s aggressive actions are an important reason that job creation in the United States has outstripped that of other industrial countries by a wide margin.”

That’s conveniently unprovable, not least because it doesn’t correct for non-monetary variables. The structural policy impediments to growth in Europe and Japan are far worse than in the U.S., yet Mr. Bernanke implies that the main policy difference is that they waited too long to try QE.

There’s a lot more in the Wall Street Journal’s counter-rebuttal of Dr. Bernanke’s retort. What’s amazing to me is that Dr. Bernanke appears to believe in what he’s saying. The simpler explanation would be that the results of quantitative easing, boosting asset prices with few other effects, was what was intended.

The whole thing reminds me of a physician who continues to prescribe a test that has been proven to be useless because it’s the standard of care. At some point you’d think you’d revisit your assumptions.

7 comments… add one
  • TastyBits Link

    I think you need to fix your URL and your tags.

  • Thanks. Fixed.

  • chattycathy Link
  • Chait focuses on one paragraph of the WSJ editorial. I’m more with Brad DeLong on this: Dr. Bernanke is just plain wrong in his remarks on how his policies produced a satisfactory reduction in unemployment.

  • chattycathy Link

    I confess to coming at this with a pre-conceived notion of the WSJ opinion pages…almost all negative. So, of course, I also agree with Brad DeLong when he writes:

    “The point of the Wall Street Journal editorial page is to pander to the prejudices of its core readers. It is not as malevolent and destructive as Fox News, which takes its mission to be to scare its core readers so that they keep their eyeballs glued to the screen so that those eyeballs can be sold to advertisers. But its mission of reinforcing evidence-free right-wing epistemic closure against any incursion of empirical reality is a malevolent and destructive one.”

  • My approach in this as in all things is to evaluate the truth or falsehood of a proposition on the merits rather than merely based on its source (a logical fallacy).

    It may be that the editors of the WSJ are wrong about inflation but right that not enough has been done about unemployment. That their prescriptions on what should be done don’t comport with mine doesn’t much bother me.

  • ... Link

    Anyone who thinks the employment situation in this country is adequate is either ignorant or evil.

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