Paul Krugman asks; “What Would Professor Bernanke Do?”  Dr. Krugman concludes that the Chairman should read some of his (Bernanke’s) old papers and pursue the policies that in the past he had supported.   Krugman argues that such policies will ignite some inflation but will lower current unemployment.  Dr. Krugman offers some decent but not real sharp insights for why Dr. Bernanke isn’t listening to his former self.   Star Trek’s The Borg is implicated.

Bernanke chairs a group of very smart Federal Reserve economists who disagree sharply about how the macro economy works.    I have little understanding of how they “know what they know”.  How do they predict the consequences of any actions they take?  What economic model of reality are they basing these predictions on?

You would have to be a very good game theorist to begin to understand the relationship between the Fed, Congress and the private sector right now.   Fears of inflation  and rising taxes retards real investment now.    There is another game being played between Bernanke and Congress.   Bernanke wants to see Congress reduce the deficit and address long run entitlements.  He appears to blame Congress for creating “uncertainty”.  His strategic choice over fighting unemployment or inflation depends on what Congress does and Congress’ legislation depends on the state of the macro economy.  Complicated stuff!     I worry that Bernanke is too aware of how future historians will write about him.

UPDATE:   This NY Times article  highlights the pressure group competition taking place within the Fed.



Author: Matthew E. Kahn

Professor of Economics at UCLA.

10 thoughts on “WWPBD?”

  1. Fears of inflation and rising taxes retards real investment now.

    I’d be interested in hearing:

    1 – some evidence that this is actually true today and
    2 – some evidence that, if this fear exists, it is justified by the facts.

    You say you have little knowledge of Bernanke’s models, and I believe you, but surely you can describe your own model.

    1. Isn’t that Krugman’s model? Sounds like Boilerplate Keynesianism.

      Raising taxes is like cutting spending, a tool for cooling an economy…ie the rejoinder to the more famous Keynesian position: increase spending and lower taxes during a downturn. Naturally, if raising taxes cools an economy, investors fear it.

      As for inflation, investors fear it b/c the Fed usually raises rates as soon as it appears…and that does to an economy the same thing cutting spending and raising taxes does. According to Paul Krugman, expectations of a Fed raise impacts the economy right now. Ergo, he advises Bernanke to change those expectations…by raising the target for inflation.

  2. “Fears of inflation and rising taxes retards real investment now.”

    I’m with the above. Where is the evidence for this? Excuse me for being blunt, but an unbelievably tendentious claim like this, blandly pasted in as an assertion, is exactly the kind of non-engagement in honest discourse — let’s call it “rank-pulling” — that continues to discredit the school-that-used-to-have-a-capital-“S”-but-will-pretty-soon-be-a-regular-school-and-while-in-some-ways-it’s-a-shame-that’s-how-the-empirical-cookie-crumbles where you got your PhD.

    “Bernanke wants to see Congress reduce the deficit and address long run entitlements. He appears to blame Congress for creating “uncertainty”.”


    I’m sorry. It’s over. No one from U of C gets to do this any more.

  3. The first two responses got this right. There is definitively no substantial fear of inflation in the financial markets right now. Anticipated 5, 10, and 30 year inflation rates as measured by TIPS spreads are 2.04%, 2.29%, and 2.41%. To the extent that TIPS treasuries are bought and held as a risk-averse hedge against inflation rather than as a straightforward alternative investment vehicle those numbers probably overstate anticipated inflation if anything. There is no empirical basis for fearing inflation right now and the markets bear this out entirely.

    Everyone who wants to talk about inflation fears and the markets should keep http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/ or similar bookmarked and consult it before writing something foolish.

  4. I thought this was one of Professor Kahn’s best blogposts. I’m sorry to see that it has not been appreciated by other commenters.

    Economists have a professional claim to technocratic expertise — and therefore, remunerative employment — which is tied to framing Fed policy as a technocratic, not a political choice, something that is accomplished, in large part, by obscuring with esoterica (microfoundations! DSGE!) the nature of the policy choice.

    In fact, as Professor Kahn indicates, the actual policy outcome is the product of political conflict, not a cerebral deliberation. Actual policy is not optimal, or even sensible — it is the outcome of a continuing stalemate or indefinite truce, among warring interests.

    Professor Krugman has written a whimsical polemic, encouraging his peeps on the Left, to keep up “the pressure” on the Fed, to “do more” without defining ways or means. Not his finest hour. But, it is typical of the professional obligation felt by economists, qua technocrats, to defend the honor of fellow guild members, and to do all they can to disable democracy, by obscuring the nature of policy/political choice.

    1. I think you’ve mixed up Kahn and Krugman in your comment. It’s Krugman who is trying to pull back the curtain on the political underpinnings of Fed decision-making, and Kahn who is trying to obscure them with pseudo-technocratic nonsense. “Fears of inflation and rising taxes retards real investment now.” What the heck is that?

      I’ll tell you what it is: Like the “uncertainty” meme, it’s a political argument dressed up as a technocratic one.

      And yet, as Kahn more-or-less points out, it’s also a well-respected opinion in the academy and at the Fed. Economics is a debased science in these latter days. Many practitioners have simply abandoned any effort to make their observations conform with reality.

      1. I didn’t mix them up. I didn’t rise to the baited cliche, as you did.

        On the quality of (macro)economics, I agree with you — “debased science” would be a mild term in my critical vocabulary. However, Kahn, the Ph.D. economist, has done us the honest service of readily admitting that he doesn’t understand the knowledge claims of the Fed economists. And, it is Kahn, not Krugman, who hypothesizes a political “game” being played between Bernanke and Congress. It is Kahn, who asserts that Bernanke wants “entitlement reform”, which is true on the evidence — soon after his re-appointment by Obama, Bernanke testified before Congress, recommending that they steal from the Social Security trust fund. (Yes, “steal” — as I recall he actually invoked the name of Willie Sutton, the famous bank robber).

        “Uncertainty” is a meme that well predates Keynes and the General Theory. It isn’t a technocratic argument, so much as it is reversion to a pre-scientific form of reasoning. In the recent blogospheric tempest, Keen v. Krugman, Keen compared New Keynesian macro, (which Krugman honors as the technical state of the art even if he doesn’t adhere to it in practice personally), to Ptolemaic astronomy, esoteric and outdated and, as you said, failing to conform observation with reality. Keen could have taken the analogy a bit further than simply challenging the lack of a foundation of functional analysis in New Keynesian sticky prices and representative agents (epicycles), by observing that Kepler’s day job was as an astrologer (!) to the Hapsburg emperor, writing essays explicating celestial omens and portents. When people do not have genuine functional understanding, they fall back on mythic narratives, loaded with morals and meaning. That’s what people do, and it drives the politics and, often, the policy as well. So, many people think “shared sacrifice” to reduce the Federal deficit will appease the Market God and magically cause good things to happen — it is cargo cult economics, which is pretty much the only economics alive at the Fed or in mainstream academia or the Koch-funded thinktanks and the corporate media. So, yes, “debased science” is mild.

        Krugman, though, is not a hero, here. His insights, as Kuhn observed, are not sharp. Krugman says the Fed should do “more”, not something else, and — this is where Krugman falls down; Kahn is right on this point — Krugman never adequately explains what they are doing now, and is as much at pains to acknowledge the difficulty of doing “more” as he is, advocating the unspecified “more”. Even in a back-handed way, Krugman goes out of his way to endorse the good intentions and technical expertise of Bernanke, just as he did, when praising Bernanke’s crisis management and backing Obama’s re-appointment of Bernanke. You’ll never get Krugman to acknowledge that Bernanke, a right-wing Republican, might be interested in furthering “entitlement reform” as part of the political struggle. You would be lucky to get Krugman to acknowledge that there is a political struggle, (as opposed to a lot of otherwise smart, credentialled economists inexplicably failing to understand Krugman’s Keynesian argument).

  5. Why would fear of inflation retard real investment? Isn’t it the other way around? Doesn’t inflation encourage spending?

  6. “Bernanke chairs a group of very smart Federal Reserve economists who disagree sharply about how the macro economy works.”

    So smart that most of them missed a multi-trillion-dollar housing bubble.

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