October 25, 2005
It's Another Game of Dingbat Kabuki! (Why Oh Why Can't We Have a Better Press Corps?)
And it's yet another game of Dingbat Kabuki, as Fred Barnes blathers away about Federal Reserve Heir Apparent Ben Shalom Bernanke on the opinion page of the Wall Street Journal. It's amazing how many misrepresentations Barnes can pile into a short column:
WSJ.com - Why Bush Picked Bernanke: WASHINGTON -- President Bush knew exactly what he wanted yesterday when he picked a successor to Alan Greenspan as chairman of the Federal Reserve Board. He sought a nominee as risk-free as possible.... Alone among the candidates, Mr. Bernanke had no detractors.
That was only one of his strengths. He is an expert on monetary policy and that, of course, is what the Fed sets.... President Bush had another major concern: protecting his economic policy. He wanted a Fed chairman who wouldn't differ sharply with his emphasis on tax cuts and tolerance of large budget deficits.... President Bush, like President Reagan two decades ago, feels economic growth is more important than deficit reduction...
But on page 598 of Ben Bernanke and Robert Frank (2001), Principles of Economics (New York: McGraw Hill: 0072289627) http://www.amazon.com/exec/obidos/asin/0072289627 we find:
Suppose the government increases spending without raising taxes, thereby increasing its budget deficit.... An increase in the government budget deficit... reduces public saving... [and] will reduce national saving as well.... At the new equilibrium F', the real interest rate is higher at r', and both national saving and investment are lower... the government has dipped further into the pool of private savings to borrow the funds to finance its budget deficit... investors [must] compete for a smaller quantity of available saving, driving up the real interest rate... mak[ing] investment less attractive, assuring that investment will decrease along with national saving.
The tendency of government budget deficits to reduce investment spending is called crowding out. Reduced investment spending implies slower capital formation, and thus lower economic growth.... This adverse effect of budget deficits on economic growth is probably the most important cost of deficits, and a major reason why economists advise governments to minimize their deficits....
Barnes is completely impervious to Bernanke's elementary textbook point: deficit reduction--Bernanke's advice that governments need to "minimize their deficits"--is a means to faster economic growth. Bernanke is as "unfriendly" to a high-deficit long-run fiscal policy as is Kohn or Ferguson--or Feldstein, for that matter.
Barnes blathers on:
It was President Bush's fear of a Fed chair hostile to his policy that doomed Mr. Greenspan's candidates -- Fed vice chairman Roger Ferguson, 54, and Donald Kohn, 62.... Even at the risk of slowing the economy, the White House was told, they would continue raising interest rates so long as the president refused to raise taxes and seriously address the deficit...
Yet if Barnes had gotten to page 753, he would have seen what Bernanke advises a central bank to do in the case in which a budget deficit produces:
[the] source of inflation [which] is excessive aggregate demand, which leads to expansionary output gaps.... To reduce inflation policymakers must reduce aggregate demand, usually through tight monetary policy [i.e., high interest rates]... reduced output and higher unemployment... a recessionary gap. These short-run costs of disinflation must be balanced against the long-run benefits of a lower rate of inflation...
There's no daylight between Bernanke and Ferguson-Kohn here either.
And there's still more!
Glenn Hubbard, 47... worked for President Bush in his first term. Mr. Hubbard, now dean of Columbia Business School, was CEA chief. He favored the Bush policies of tax cuts and partial privatization of Social Security, but the president felt Mr. Hubbard sometimes talked down to him...
I do think that of mainline Republican economists Ben Bernanke is the best choice for Fed Chair--monetary policy is his thing. Glenn Hubbard is much better qualified for the most senior jobs at the Treasury. But to refuse to consider Glenn Hubbard's extremely strong merits because Bush's feelings are hurt because he thinks Glenn "talked down" to him... that's a hell of a way to run a personnel selection process, that's all I'm sayin.
Posted by DeLong at October 25, 2005 07:31 PM