Month: May 2012

Back in the late 1990s and early 2000s, Ben Bernanke sharply criticized the Bank of Japan. He argued that even though the BoJ had cut its target interest rate to near-zero, it could and should do much more to end deflation and to stimulate Japan\’s economy. In the last few months, a number of critics have accused Bernanke of inconsistency: that is, the Ben Bernanke who has been leading the Fed in the aftermath of the Great Recession is not following the advice of the Ben Bernanke who was criticizing the Bank of Japan back in 2000-2003. To me, this criticism seems like pretty thin gruel: indeed, I think the accusation of inconsistency basically an attention-getting cover for a more mundane policy disagreement over whether the Fed should immediately start another round of quantitative easing. Here, I\’ll lay out the arguments here as I seem them.

Bernanke\’s Earlier Criticisms

Bernanke first became a member of the Fed\’s Board of Governors in 2002. Back in 2000, while still a professor at Princeton, he published an essay called: “Japan’s Slump: A Case of Self-Induced Paralysis?” In the essay, Bernanke sharply criticizes the Bank of Japan for taking the position that since it had lowered its target interest rate to near-zero, there was nothing more it could do. In contrast Bernanke argued that a central bank had a number of other options when confronted with deflation: a long-term commitment to a near-zero interest rate; setting an inflation target of 3-4 percent per year; intervention in exchange-rate markets to depreciate the yen; using money creation to finance deficit spending; and central bank purchases of long-term government bonds, corporate bonds, and other financial securities.

Bernanke made similar arguments after joining the Fed. For examples, see his November 21, 2002 talk to the National Economists Club in Washington, D.C. called Deflation: Making Sure \”It\” Doesn\’t Happen Here\” or his May 31, 2003 talk to the Japan Society of Monetary Economics in Tokyo called \”Some Thoughts on Monetary Policy in Japan.\”  These talks do differ a bit in emphasis. For example, after joining the Fed, Bernanke was careful to say that he was in no way contemplating interventions in exchange rate markets. But the general messages remained the same: namely, that a central bank has a lot of tools available even when it has cut its target interest rate to near-zero, and that the Bank of Japan should make more aggressive use of these tools.

\”Bernanke was and is a fine economist. More than that, before joining the Fed, he wrote extensively, in academic studies of both the Great Depression and modern Japan, about the exact problems he would confront at the end of 2008. He argued forcefully for an aggressive response, castigating the Bank of Japan, the Fed’s counterpart, for its passivity. Presumably, the Fed under his leadership would be different. 

\”Instead, while the Fed went to great lengths to rescue the financial system, it has done far less to rescue workers. The U.S. economy remains deeply depressed, with long-term unemployment in particular still disastrously high, a point Bernanke himself has recently emphasized. Yet the Fed isn’t taking strong action to rectify the situation.

\”The Bernanke Conundrum — the divergence between what Professor Bernanke advocated and what Chairman Bernanke has actually done — can be reconciled in a few possible ways. Maybe Professor Bernanke was wrong, and there’s nothing more a policy maker in this situation can do. Maybe politics are the impediment, and Chairman Bernanke has been forced to hide his inner professor. Or maybe the onetime academic has been assimilated by the Fed Borg and turned into a conventional central banker. Whichever account you prefer, however, the fact is that the Fed isn’t doing the job many economists expected it to do, and a result is mass suffering for American workers.\”

That\’s a heavy accusation, and Krugman isn\’t alone in making it. In a working paper for the National Bureau of Economic Research, Lawrence Ball argues that Bernanke has been inconsistent, and collects some other examples (\”Ben Bernanke and the Zero Bound, WP #17836, February 2012).
For example, after discussing some of Bernanke\’s earlier writings, Christina Romer (formerly head of the Council of Economic Advisers at the start of the Obama administration) reportedly said: “My reaction to it was, ‘I wish Ben would read this again.’” Joseph Gagnon (a former Fed economist now at the Peterson Institute) uses the title of Bernanke’s criticism back in in 2000 of the Bank of Japan to criticize Fed policy: “It’s really ironic. It’s a self-induced paralysis.”

Bernanke Pushes Back


Bernanke pushed back against the criticism of inconsistency in his press conference of April 25, 2012. In particular, here\’s part of what he answered in response to the question: \”[S]pecifically
could you address whether your current views are inconsistent with the views on that subject that you held as an academic?\” Bernanke answered:

\”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. Our–my views and our policies today are completely consistent with the views that I held at that time. I made two points at that time to the Bank of Japan. The first was that I believe that a determined central bank could and should work to eliminate deflation, that is falling prices. The second point that I made was that when short-term interest rates hit zero, the tools of a central bank are no longer–are not exhausted, there are still other things that the central bank can do to create additional accommodation. Now looking at the current situation in United States, we are not in deflation. When deflation became a significant risk in late 2010 or at least a modest risk in late 2010, we used additional balance sheet tools to help return inflation close to the 2 percent target. Likewise, we have been aggressive and creative in using nonfederal funds rate centered tools to achieve additional accommodation for the U.S. economy. So the very critical difference between the Japanese situation 15 years ago and the U.S. situation today is that Japan was in deflation and clearly when you\’re in deflation and in recession, then both sides of your mandates, so to speak, are demanding additional accommodation. In this case is we are not in deflation, we have an inflation rate that\’s close to our objective. Now, why don\’t we do more? Well, first I would again reiterate that we are doing great deal, policy is extraordinarily accommodative, we–and I won\’t go through the list again, but you would–you know all the things that we have done to try to provide support to the economy. 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? The view of the Committee is that that would be very reckless. We have–we, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation which has proved extremely valuable in that we\’ve been be able to take strong accommodative actions in the last 4 or 5 years to support the economy without leading to a unanchoring of inflation expectations or a destabilization of inflation. To risk that asset for what I think would be quite tentative and perhaps doubtful gains on the real side would be, I think, an unwise thing to do.\”

As someone without any dog in this fight, how well-founded is the criticism that Bernanke has been inconsistent? Two broad points are worth considering here: How much does Japan\’s situation in the late 1990s differ from the U.S. situation in the Great Recession and its aftermath? And how has the Fed reaction differed from the Bank of Japan\’s reaction?

Remembering Japan\’s Asset Bubble and the Policy Reaction

Japan\’s Nikkei 22 stock market index rose almost seven-fold in the from 6,000 in 1980 to peak at almost 40,000 at the end of 1989. It then dropped by nearly half in 1990, and had slid back to 8,000 by 2003. Similarly, average land prices for Japan doubled from 1980 to 1991, and then fell back to 1980 levels by about 2004. Banks suffered huge paper losses, but were not forced to reorganize: instead, they took the low interest rates from the Bank of Japan and continued offering loans to underwater \”zombie\” firms. Moreover, Japan had begun by about 1998 to experience deflation, so even near-zero nominal interest rates were actually positive real interest rates.

In comparison, the U.S. Dow Jones Average rose by about 50% from 2003 to 2007, then fell back to below 2003 levels in early 2009, but now has recovered back to near the 2007 peak. The U.S. housing price bubble has been real and painful, but it wasn\’t a doubling and then a halving for the average of all housing prices nationwide. The U.S. had very low inflation for a time, but it hasn\’t actually dipped into deflation. U.S. banks have been recapitalized, by hook and by crook, and forced to undergo stress tests.

In short, an implicit argument that an impartial policymaker should react in exactly the same way to Japan circa 2000 and to the U.S. economy circa 2012 is off the mark, because the situations are substantially different.

Central Bank Policy Reactions

Bernanke\’s criticism back in 2000 was in response to the fact that in the face of this situation, Japan\’s central bank had done almost nothing but reduce interest rates for an entire decade.  In contrast, the Fed under Bernanke reacted much more quickly.

1. The Fed started reducing the federal funds interest rate in 2007, and took it down to near-zero in late 2008. It took the Bank of Japan about four years after the crash to move its target interest rate down to near-zero; the Fed made this change in about 18 months. 
2. The Fed set up a number of temporary agencies to give short-term loans to all sorts of players in the financial industry in late 2007, including the Term Auction Facility (TAF), Term Securities Lending Facility (TSLF), Primary Dealer Credit Facility (PDCF), Commercial Paper Funding Facility (CPFF), Term Asset-Backed Seucurities Loan Facility (TALF), and others.  All of these agencies were about making short-term loans to get through the crisis, and they were all closed by mid-2010.
3. The Fed carried out \”quantitative easing\” through the direct purchase of U.S. Treasury debt–essentially printing money to finance $1 trillion or so of federal borrowing.
4. The Fed also carried out \”quantitative easing\” through the direct purchase of a $1 trillion or so of mortgage-backed securities–essentially printing money to provide finance in this sector.
5. The Fed offered forward guidance about its plans, announcing that it would keep the target interest rate near-zero interest rate low through 2014.   
6. The Fed now has the power to pay interest to banks on the reserves they are required to hold with the Fed, giving the Fed another monetary policy tool.
7. The Fed has also changed its policies so that it doesn\’t just buy short-term Treasury debt, but also buys long-term securities. 

My point here is not to argue over whether each of these policies is effective or useful or appropriate. Instead, I\’m listing the policies to emphasize that the Ben Bernanke who wrote back in 2000 has also deployed an unprecedented array of monetary policy tools. Back in 2007, it was reasonable to teach in an intro econ class that the Federal Reserve took action by affecting the federal funds interest rate through open market operations. By 2010, just three years later, the policy menu of the Fed had been transformed. The critics cannot plausibly accuse Bernanke or the Federal Reserve of following the Bank of Japan in the 1990s, cutting interest rates and then sitting on his hands. Instead, to the extent that their claim of inconsistency has any merit, the claim must be that Bernanke should lead the Fed toward even more aggressive use of these non-interest rate tools. But just what non-interest rate tools should be used

Back in his 2000 essay, Bernanke argued that one policy alternative for Japan was to intervene in foreign exchange markets to drive down the value of the yen. However, Bernanke\’s critics, when accusing him of inconsistency, often don\’t mention the policy alternative of driving down the U.S. dollar exchange rate. For example, Krugman doesn\’t mention this choice in his New York Times Magazine article.

Bernanke also recommended back in 2000 that the Bank of Japan announce an inflation target of 3-4 percent, but the Fed has not announced such a target for the U.S. economy. Part of the reason for this may be a matter of legality: the Fed has never announced an official target for the inflation rate, but instead has discussed its legal mandate to deliver \”price stability.\” However, by announcing that the federal funds interest rate will stay near-zero into 2014, the Federal Reserve has in effect promised that even if the economy recovers, it will allow inflation to rise rather than raising interest rates. Of course, the Fed could renege on this promise: but it could renege on an inflation target, too. My guess is that the Fed believes that it has made plenty clear to anyone with eyes to see that as long as economic growth remains so sluggish, it would not clamp down on a low level of inflation.

The remaining dispute is over whether Bernanke should push the Fed to do more of what it has already done; in particular, should the Fed print money to purchase another trillion or two (or three or four) in Treasury debt or private-sector financial securities? One can disagree back-and-forth about the usefulness and risks of this policy choice in good faith. I happen to agree with Bernanke and the Board of Governors that the time isn\’t ripe for such a step just now. But even if one thinks that the Federal Reserve should be even more aggressive with quantitative easing just now, there is no serious inconsistency between Bernanke\’s 2000 essay about Japan and deciding not to double down on quantitative easing in the U.S. economy back in 2011 or right now.

There is considerable evidence that recovering from a deep financial crisis takes several years, as households and firms and financial institutions shed debt and rebalance their financial situations. The assertion that this recovery process would have been dramatically shorter if only the Fed would have financed an additional few trillion dollars in quantitative easing is a highly controversial claim–a hopeful theoretical prediction not based on any historical examples.   Bernanke\’s writings from 2000 to 2003 argue that a central bank confronted with a financial crisis should make aggressive use of unorthodox non-interest rate policies to avoid deflation, and the Fed under his leadership has done so. But Bernanke\’s earlier writings do not suggest that such non-interest rate policies are a cure-all for what ails an economy and for getting the unemployed back to work the aftermath of a financial crisis. The earlier writings do not suggest that these non-interest rate policies be pursued without limit even after an economy has started growing again, and without regard for balancing their  potential gains and losses.  

The good folks at the U.S. Bureau of Labor Statistics divide the adult population into three groups: the employed, the unemployed, and those out of the labor force. When an employed person stops working, if they are looking for work, they are counted as unemployed; if they aren\’t looking for work, they are counted as out of the labor force. This distinction makes conceptual sense: it would be peculiar to treat a 75 year-old retiree not looking for a job, or a stay-at-home spouse, as \”unemployed.\” But there are obvious practical difficulties with these distinctions as well.  For example, \”discouraged\” workers who would like a job, but who have given up looking, will be counted as out of the labor force, although their situation looks more like unemployment.

So how many discouraged workers are there? Actually, the same survey that is used to count the unemployed can also be used to count \”discouraged workers.\” In fact, BLS counts \”discouraged\” workers as one of two parts of an overall group of people who are \”Marginally attached to the labor force.\”

Within the overall category of \”marginally attached,\” the first subcategory of \”discouraged\” workers \”[i]ncludes those who did not actively look for work in the prior 4 weeks for reasons such as thinks no work available, could not find work, lacks schooling or training, employer thinks too young or old, and other types of discrimination.\” The other subcategory of \”other persons marginally attached to the labor force … [i]ncludes those who did not actively look for work in the prior 4 weeks for such reasons as school or family responsibilities, ill health, and transportation problems, as well as a number for whom reason for nonparticipation was not determined.\”

Here\’s a graph of the data from BLS, which I made using the ever-helpful FRED tool from the Federal Reserve Bank of St. Louis. The bottom line shows the number of discouraged workers fluctuated around 400,000 from 1994 up to about 2008–a little higher in the aftermath of the 1990-91 and 2011 recessions, a little lower other times. But in the aftermath of the Great Recession, the number of discouraged workers spiked above 1.2 million, before falling back to under  million more recently.

The top line shows the broader category of \”marginally attached\” workers, which includes both those classified as \”discouraged\” and those who are marginally attached for other reasons. From 1994 it fluctuates around 1.5 million: higher in the aftermath of the 1990-91 and 2001 recessions, lower other times. But since 2008, it spiked up to 2.8 million, before dropping back to around 2.4 million more recently.

For comparison, the number of unemployed people (and remember, \”discouraged\” doesn\’t count as unemployed) was 12.7 million in March 2012. There were 865,000 \”discouraged\” workers in March 2012, and 2,352,000 in the total \”marginally attached\” category. Thus, if one wanted a broader picture of the labor market including both those officially classified as unemployed along with the discouraged, the total number of people in these two categories would have been would have been about 7% higher than official unemployment alone, at 13,565,000. If one wanted a broader picture of the labor market including both the unemployed and all of the \”marginally attached,\” the total would have been 18% higher than official unemployment alone, at 15,052,000.

It doesn\’t seem right to treat the officially unemployed, who are actively looking for work, as in the same situation as the \”marginally attached.\” But the high numbers of discouraged and marginally attached do demonstrate that the unemployment rate only captures one aspect of the weakness in U.S. labor markets.

In September 2009, President Obama approved a special tariff on imports of tires from China. In his 2012 State of the Union address, he stated that the policy had saved \”over a thousand\” jobs. Gary Clyde Hufbauer and Sean Lowry look at what happened in \”US Tire Tariffs: Saving Few Jobs at High Cost,\” written as an April 2012 \”Policy Brief\” for the Peterson Institute for International Economics.

The basic economic lessons here are the same as ever. There\’s never been any question that imposing tariffs on foreign competition could dissuade imports, and thus allow U.S. manufacturers to keep production and prices higher than they would otherwise be. As a result, U.S. consumers pay more, the firms make higher profits–and workers for those firms get some crumbs from the table. In this case, Hufbauer and Lowry estimate that consumers paid $1.1 billion in higher prices for tires in 2011. This saved a maximum of 1,200 jobs, so the average cost of the tariff was $900,000 per job saved. But of course, the worker didn\’t receive that $900,000; instead, most of it went to the tire companies. And in an especially odd twist, most of it contributed to profits earned by non-U.S. producers.

The story starts before in September 2009, when U.S. tariffs on tire imports were in the range of 3.4-4.0%. \”Starting on September 26, 2009, Chinese tires were subjected to an additional 35 percent ad valorem tariff duty in the first year, 30 percent ad valorem in the second year, and 25 percent ad valorem in the third year.\” The higher tariffs did reduce tire imports from China.  For example, \”radial car tires imported from China fell from a high of approximately 13.0 million tires in 2009Q3 to 5.6 million tires during 2009Q4—a 67 percent decrease.\”

Employment in the U.S. tire industry rose from 50,800 in September 2009 to 52,000 by September 2011, which is the basis for a rough estimate that 1,200 jobs were saved by the tariffs. (Of course, one could argue that jobs would have declined without the tariffs, so more than 1,200 jobs were saved, or one could argue that some of the job increase came from other forces, so less than 1,200 jobs were saved by the tariffs.)The average salary of a tire builder was $40,070 in 2011. So multiplying this income by 1,200 jobs, the total additional income received by tire workers would be $48 million.

Data from the Consumer Price Index shows that prices of tires from U.S. companies jumped after the tariff was imposed. This is totally expected, of course: the reason that import tariffs benefit U.S. firms is that it allows them to charge higher prices than they would otherwise be able to do. Hufbauer and Pauly calculate that the import restraints on Chinese tires led to additional higher prices for tires cost U.S. consumers about $295 million per year.

As U.S tire imports from China declined, tire imports increased from other countries. Indeed, the U.S. was importing about 27 million tires in the third quarter of 2009, when the tariff took effect, but was importing about 30 million tires by the third quarter of 2009. The tariff on Chinese-produced tires cut imports from China, but tire imports from places like Mexico, Indonesia and Thailand rose. The tariffs on China allowed these producers to raise prices for tires paid by U.S. consumers to the tune of about $800 million.

When tariff policy is laid out in this way, it looks literally insane. No one would ever advocate a policy of imposing a tax worth $1.1 billion on all U.S. purchasers of tires, with $48 million to go to actual workers who produce tires, $250 million to go to U.S tire companies, and $800 million of the revenue from that tax to go to foreign tire producers.

Moreover, any jobs saved in the tire industry were almost certainly more than offset by losses of jobs elsewhere in the economy. Hufbauer and Lowry do a back-of-the-envelope illustrative calculation that if the additional money spent on tires was diverted from other retail spending, it would cost something like 3,770 jobs in the retail sector. Also, China retaliated against the U.S. decision by imposing tariffs on U.S. exports of chicken parts. Hufbauer and Lowry report: \”The Chinese tariffs reduced exports by $1 billion as US poultry firms experienced a 90 percent collapse in their exports of chicken parts to China. Given the timing of the Chinese government’s actions, many trade policy experts view the trade dispute over China’s imports of “chicken feet” from the United States as a tit-for-tat response to the US safeguards on Chinese tire exports.\” Even as an attempt to save U.S. jobs at exorbitant cost,  President Obama\’s tariffs on Chinese tires were a failure.