In the 1990s, when both men were members of the Princeton University economics department, Paul Krugman and Ben Bernanke would frequently discuss monetary policy in Fisher Hall. Now, the two economists debate issues surrounding growth, inflation, and the mission of the Federal Reserve, in much larger rooms. In his New York Times columns, media appearances, and in his new book, End This Depression Now, Krugman has criticized Bernanke's Fed for not doing enough to spur economic growth and reduce unemployment. In his press conference last week, without naming names, Bernanke punched back at some of Krugman's specific criticisms.
Bernanke has yet to accept our invitation to join the Daily Ticker for an exclusive interview. But Krugman came by our New York studio to discuss his new book, the economy, and his former Princeton colleague.
Krugman has persistently argued that the Federal Reserve should come out and say it would be willing to tolerate slightly higher inflation than we have now as a way of goosing the economy. Bernanke disagrees. Back in the 1990s, Krugman argues, "Ben Bernanke was on my side. So he's flipped and has become a conventional central banker. He's saying that aggressive measures to boost the economy and in particular raising the inflation target a little bit, which a lot of us think is the most effective thing for the Fed to do, would be imprudent and risky." Krugman notes that Bernanke had criticized Japan for not taking such efforts to combat its economic malaise in the past. As well, he notes, "it's a really odd thing to be deeply worried that we might have inflation as high as it was in Ronald Reagan's second term, as opposed to having the highest level of long-term unemployment we've had since the 1930s."
Krugman notes that the hyperinflation that critics warned would materialize as a result of the Fed's aggressive monetary policies of 2008 and 2009 hasn't come to pass. He points to the Consumer Price Index, which has risen 2.7 percent in the past 12 months, and to other measures such as M.I.T.'s Billion Price Index.
Essentially, Krugman argues that Bernanke changed his mind on the need for the Fed to tolerate higher inflation in the short term over the past several years for two reasons. First, "basically the Fed staff doesn't like adventurous policies. To some extent he's been converted by the Fed's internal culture." Second, Krugman believes Bernanke and the Fed have been subject to political intimidation. Remember Texas Gov. Rick Perry's now-infamous "treasonous" attack of last year?
"The main thing the Fed can do is promise that they will be very slow to step on the brakes, that as the economy recovers that they will let inflation rise, not to high levels, but to 3 or 4 percent from two percent," Krugman suggested. "That would move the markets quite a lot. It would lead people who are making plans to think that sitting on cash is not a good idea. That's the strategy Bernanke urged on the Japanese twenty years ago."
In his press conference last week, Bernanke pushed directly back against this suggestion. "I guess the question is, does it make sense to actively seek a higher inflation rate in order to achieve a slightly increased reduction--a slightly increased pace of reduction in the unemployment rate?" he wondered. "The view of the Committee is that that would be very reckless."
That exchange highlights a strange dichotomy at the Fed. Bernanke and his fellow central bankers have a dual mandate — to fight inflation and promote maximum employment. But Bernanke & Co. get very animated about protecting the purported victims of inflation (bondholders) while expressing a distinct lack of urgency about alleviating the suffering of the victims of unemployment. What accounts for that? "Part of this is institutional," Krugman said. "For the Fed to say that 'we've done all we can' makes life easier for them." But he notes that sociology comes into play as well. Central bankers and Wall Street bankers are part of the same system; the unemployed simply are not. "How many meetings at the Board of Governors or of the New York Fed have the ranks of the unemployed at the table?" Krugman asks.
Daniel Gross is economics editor at Yahoo! Finance
Follow him on twitter @grossdm; email him at firstname.lastname@example.org
His new book, Better, Stronger, Faster: The Myth of American Decline and the Rise of a New Economy, will be published on May 8 by The Free Press.