Friday, April 29, 2011

Bad Ideas

The general reaction to Bernanke's press conference is reinforcing what I expressed here, which is that having the Fed Chair hold regular press conferences is a bad idea. Everyone is now taking an otherwise bland and no-news occasion, and trying to make hay out of it. The Fed cannot gain anything by going out of its way to draw attention to itself.

On the left, in addition to what I wrote about here, Krugman has predictably weighed in with his own two cents' worth. Basically, Krugman is back with Samuelson and Solow in 1960. He thinks that there is a Phillips curve, and that monetary policy is about choosing a point on it. We can get less unemployment at the expense of higher inflation. From Krugman's point of view the tradeoff looks pretty good right now. Inflation is in fact too low so we actually have nothing to lose. We can get more inflation and less unemployment, and sacrifice absolutely nothing. But there is a problem, which is this one. Phillips curve or not, there is not a damn thing the Fed can do that it has not done already, so Krugman should not spend his time bothering Ben Bernanke.

Krugman also gets upset about Bernanke's word usage. Apparently Ben does not say "unemployment" enough. Here, we have to go back to the first law of central banking, which is that a central banker should not speak too much about things over which he or she has little or no control. The Fed can do a great job of pegging some overnight nominal interest rate, and controlling inflation over the medium term, but ultimately we have to deal with the neutrality of money over some horizon and the vagaries of financial markets, so everything else is up for grabs. Speak too much about things you cannot control well, like the stock market or the unemployment rate, and you own them. As a result, you'll have to claim responsibility when things go badly, even when it's not your fault.

Krugman may be full of hot air, but the average New York Times reader does not know that. I'm sure plenty of them are incensed this morning, thinking that Ben Bernanke hates the unemployed and is in league with Ron Paul.

Speaking of Ron, he has been getting a lot of action too. See this, for example. To give Ron Paul credit, he has actually picked up on the Phillips curve idea, and that thinking about monetary policy in the way Krugman does is malarky. For example, Krugman says:
The Fed normally takes primary responsibility for short-term economic management, using its influence over interest rates to cool the economy when it’s running too hot, which raises the threat of inflation, and to heat it up when it’s running too cold, leading to high unemployment.
Ron Paul at least seems to get the idea that monetary policy is mainly about controlling inflation, and that we don't control inflation by controlling the unemployment rate. Otherwise, poor Ron is badly misguided, as I discuss at length here. In the interview I link to he makes a big deal about the "tripling of the money supply," obviously not recognizing that reserves that just sit overnight look a lot more like Treasury bills than currency.

Ron Paul of course is probably running for President. Bernanke has injected himself into a political forum and Ron Paul, a politician, is using the opportunity to further his goals at Bernanke's expense. I'm sure plenty of right-wing Ron Paul supporters are following Ron Paul's lead, and are incensed this morning at the Fed's bad behavior.

Thus, the left is unhappy, the right is unhappy, and probably the people in the middle don't care much, other than that the prices of food and gasoline are increasing at a high rate, which can't be good for Ben Bernanke either.


  1. Steve,

    You wrote, "Basically, Krugman is back with Samuelson and Solow in 1960. He thinks that there is a Phillips curve, and that monetary policy is about choosing a point on it."

    That this is not at all what Samuelson and Solow said in that 1960 paper. Abba Lerner's comment on the paper, in fact, takes them to task for not recommending more inflation in exchange for higher employment.

  2. So you are saying there were some people that were even more wrong than Samuelson and Solow?

  3. I don't know about "more wrong" as Samuelson and Solow seemed to advocate the cost-push view of inflation and incomes policies. That was wrong too!

  4. I think we can say this was a bad paper by two people who, on most days, were excellent economists.