Because I was less confident in the ability of monetary policy to get us out
of this mess than most, I called for fiscal policy relatively early, and my view
that monetary policy is unlikely to be of much help hasn't changed. But we're
unlikely to get a significant additional fiscal stimulus at this point, lots of
people disagree with my pessimism about monetary policy, and we need to try
something to revive labor markets:
Bernanke’s Unfinished Mission, by Paul Krugman, Commentary, NY Times: Ben
Bernanke, the Federal Reserve chairman, recently had some downbeat things to say
about our economic prospects. ... All we can expect, he said, is “modest
economic growth next year — sufficient to bring down the unemployment rate, but
at a pace slower than we would like.”
Actually, he may have been too optimistic: There’s a good chance that
unemployment will rise, not fall, over the next year. But even if it does inch
down, one has to ask: Why isn’t the Fed trying to bring it down faster? ... My
back of the envelope calculation says that we need to add around 18 million jobs
over the next five years, or 300,000 jobs a month. ... So ... someone has to
take responsibility for creating a lot of additional jobs. And at this point,
that someone almost has to be the Federal Reserve.
I don’t mean to absolve the Obama administration of all responsibility. Clearly,
the administration proposed a stimulus package that was too small to begin with
and was whittled down further by “centrists” in the Senate. And the measures
President Obama proposed earlier this week ... fall far short of what the
But ... the political reality is that the president ... probably can’t get
enough votes in Congress to do more than tinker at the edges of the employment
problem. The Fed, however, can do more.
Mr. Bernanke has received a great deal of credit,... rightly so, for his use of
unorthodox strategies to contain the damage after Lehman Brothers failed. But
... the urgency of late 2008 and early 2009 has given way to a curious mix of
complacency and fatalism — a sense that the Fed has done enough now that the
financial system has stepped back from the brink, even though its own forecasts
predict that unemployment will remain punishingly high for at least the next
The most specific, persuasive case I’ve seen for more Fed action comes from
Joseph Gagnon, a former Fed staffer now at the Peterson Institute for
International Economics. Basing his analysis on the prior work of ... Mr.
Bernanke himself,... Mr. Gagnon urges the Fed to expand credit by buying a
further $2 trillion in assets. Such a program could do a lot to promote faster
growth, while having hardly any downside.
So why isn’t the Fed doing it? Part of the answer may be political: Ideological
opponents of government activism tend to be as critical of the Fed’s credit
expansion as they are of the Obama administration’s fiscal stimulus. And this
has probably made the Fed reluctant to use its powers to their fullest extent.
Meanwhile, a significant number of Fed officials, especially at the regional
banks, are obsessed with the fear of 1970s-style inflation ... even though
there’s not a hint of it in the actual data.
But there’s also, I believe, a question of priorities. The Fed sprang into
action when faced with the prospect of wrecked banks; it doesn’t seem equally
concerned about the prospect of wrecked lives.
And that is what we’re talking about here. The kind of sustained high
unemployment envisaged in the Fed’s own forecasts is a recipe for immense human
suffering — millions of families losing their savings and their homes, millions
of young Americans never getting their working lives properly started because
there are no jobs available when they graduate. If we don’t get unemployment
down soon, we’ll be paying the price for a generation.
So it’s time for the Fed to lose that complacency, shrug off that fatalism and
start lending a hand to job creation.
Posted by Mark Thoma on Friday, December 11, 2009 at 12:30 AM in Economics, Monetary Policy |