Ben Bernanke’s Senate Testimony

I always feel that these hearings are usually nothing more than a chance for political leaders to grandstand portray their ignorance. It is usually always easy for a technical expert to come up with an answer which sounds impressive while not really saying a lot, and that most people will be unable to decipher. However, there was one great question, by Klobuchar, which deserved a follow up. (This was well covered by Yglesias):

[Mr Bernanke]… what would you have done differently under a single mandate to target inflation

and Ben Bernanke hummed and hawed and said, essentially, that he would have done nothing differently. This seems a pretty damning indictment of BB’s policy really, if, with unemployment high and inflation consistently below target, you are not going to take the opportunity to do extra stimulus to lower unemployment, what exactly is the point in a dual mandate?

The dual mandate exists because central bankers have known since forever that a little bit of extra demand, which usually creates a little extra inflation, is helpful in lowering unemployment. This is the wisdom of the Philip’s curve, which, for all its flaws, at least underlines the truth that very low inflation is nearly always correlated with high unemployment.

Of course, perhaps BB was aiming an under the radar shot at his FOMC hawks: I mean, with the board that he has, perhaps he is unable to force through policy that is expansionary enough for him to feel that he his fulfilling his legal mandate, but he could have chosen to put forwards the hawk’s argument, which would be that excess stimulus would not help unemployment fall any faster. This is a nice argument for this type of hearing, as there is clearly some empirical limit on how fast unemployment can fall – no matter how expansionary, the Fed could not restore full employment in one day. I am completely certain that it could do a hell of a lot better than it is doing, but I accept that falls in unemployment of more than 2% a year are fairly implausible. And if they attempted that they really might cause some inflation.

Nevertheless, I cannot help but think that BB’s decision to say nothing was itself an overtly political statement about his feelings on the manner. He is required to go and defend Fed policy, even if he was on the losing side of the FOMC consensus. Just as Mervyn King is forced to talk about how the committee feels there the “costs and risks” of further QE outweigh the benefits, even though we know he voted for more QE.

Finally, we can speculate on some nice follow up questions that I might have asked:

BB, do you believe that a more expansionary policy would cause unemployment to drop faster, while keeping inflation expectations steady?

He would almost be forced to answer yes, and now he would be in a really tight spot, then we could ask

BB, given that you believe that expansionary policy would bring down unemployment faster, while maintaining inflation expectations, do you believe that your policy is legal?

Could ask this instead:

BB, it is my understanding that the dual mandate exists because of the well known relationship between higher inflation and lower unemployment. Thus, logically, a dual mandate must lead to higher inflation than a single mandate whenever unemployment is significantly above its natural rate. Do you agree?

Or how about this one:

BB, which members of the FOMC do we need to impeach to enable you to legally fulfil your mandate?

Wouldn’t that have made great TV!

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2 responses to “Ben Bernanke’s Senate Testimony”

  1. dajeeps says :

    It’s a standard rule of construction, when interpreting an item of text, to interpret it in such a way as to give the entire item meaning. The so called dual-mandate is really only a single mandate, that which “to manage monetary and credit aggregates commensurate with the economy’s ability to produce; as to promote full employment, stable prices, and moderate long term interest rates.” The mandate is a single sentence, and so it is quite difficult to pick one part, while excluding all of the rest and assume compliance. There is no way, according to a basic AS/AD model, that a monetary policy regime that does not allow negative supply shocks to lead to higher inflation would be consistent with a mandate to manage monetary and credit aggregates commensurate with the economy’s ability to produce. as it would lead to much a much higher output gap. The entire policy of hard core inflation targeting, inclusive of headline inflation measures is illegal; and I suspect that even if the Fed were to choose core PCE it would still be illegal.

    I find it quite shocking that the Bernanke Fed has gotten away with wandering off the reservation, with almost none of our elected officials holding it to account. But I suppose having an economic calamity such as this one is just too politically advantageous for the both sides of the aisle for them to do anything about it.

    • dajeeps says :

      Just to ensure consistency, I pulled out the exact quote from the Full Employment and Balanced Growth Act (I was citing from memory in my previous quote, which apparently isn’t as sharp as I’d like):

      “[The Federal Reserve] shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”

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