On April 24 The New York Times Magazine published an article by Nobel Prize winning economist Paul Krugman. In his article, Krugman lambastes Federal Reserve Chairman Ben Bernanke for not doing more to help the economy. Krugman seems upset that Bernanke once advocated for greater intervention by the Bank of Japan to stem economic malaise in the Japanese economy, but the Fed Chairman will not intervene more forcefully to help the U.S. economy.
The “evidence” for Krugman’s critique comes mostly in this paragraph:
In a hard-hitting 2000 paper titled “Japanese Monetary Policy: A Case of Self-Induced Paralysis?” Bernanke declared that “far from being powerless, the Bank of Japan could achieve a great deal if it were willing to abandon its excessive caution and its defensive response to criticism.” He proceeded to lay out a number of actions the Bank of Japan could take. And he called on Japanese policy makers to act like F.D.R. and do whatever it took: “Japan is not in a Great Depression by any means, but its economy has operated below potential for nearly a decade. Nor is it by any means clear that recovery is imminent. Policy options exist that could greatly reduce these losses. Why isn’t more happening? To this outsider, at least, Japanese monetary policy seems paralyzed, with a paralysis that is largely self-induced. Most striking is the apparent unwillingness of the monetary authorities to experiment, to try anything that isn’t absolutely guaranteed to work. Perhaps it’s time for some Rooseveltian resolve in Japan.”
At a press conference yesterday after the Federal Reserve Open Market Committee meeting, Chairman Bernanke called Krugman’s assertions “absolutely incorrect.” He said of Krugman’s assertions:
So there’s this view circulating that the views I expressed about 15 years ago on the Bank of Japan are somehow inconsistent with our current policies. That is absolutely incorrect. My views and our policies today are completely consistent with the views that I held at that time.
Krugman went on in his article to castigate Bernanke for not supporting an increase in the target rate of inflation, writing:
Another set of options involves trying to change expectations about future Fed policy. Right now, investors believe that the economy will eventually recover enough for the Fed to start raising rates again. Such expectations about future Fed plans, in turn, can have an important impact on the economy right now. … If the Fed were to raise its target for inflation — and if investors believed in the new target — expected inflation over the medium term, say the next 10 years, would be higher. Many economists, ranging from the chief economist of the International Monetary Fund to one of Mitt Romney’s top economic advisers, have argued, as I have, that higher expected inflation would aid an economy up against the zero lower bound, because it would help persuade investors and businesses alike that sitting on cash is a bad idea [Ed. note: A truly idiotic idea].
Bernanke swatted away the idea of raising the inflation target in the United States the way he had suggested for Japan by saying:
Does it make sense to actively seek a higher inflation rate in order to achieve a slightly increased pace of reduction in the unemployment rate? The view of the committee is that would be very reckless. We at the Federal Reserve have spent 30 years building up credibility for low and stable inflation, which has proved extremely valuable in that we have been able to take strong and accommodative actions in the last four or five years to support the economy without leading to an un-anchoring of inflation expectations or a destabilization of inflation [Ed. note: After QE1, QE2, Twist and other measures that’s debatable, but a topic for another post]. To risk that asset for what I think would be quite tentative and perhaps doubtful gains on the real side would be unwise to do.