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October 31, 2005

Paul Krugman Is Mellow Today

He praises Ben Bernanke. He even praises Alan Greenspan (somewhat):

Bernanke and the Bubble By PAUL KRUGMAN: By Bush administration standards, the choice of Ben Bernanke to succeed Alan Greenspan as chairman of the Federal Reserve was just weird. For one thing, Mr. Bernanke is actually an expert in monetary policy, as opposed to, say, Arabian horses.... Bernanke's partisanship... is so low-key that his co-author on a textbook didn't know he was a registered Republican. The academic work on which his professional reputation rests is apolitical. Moreover, that work is all about how the Fed can influence demand - there's not a hint in his work of support for the right-wing supply-side doctrine....(1) [H]e's a policy activist who advocates aggressive government moves to jump-start stalled economies. For example, a few years back Mr. Bernanke called on Japan to show "Rooseveltian resolve"... supported a proposal by yours truly that the Bank of Japan try to get Japan's economy moving by... announcing its intention to push inflation up to 3 or 4 percent per year....

It's even hard to imagine him doing what Mr. Greenspan did: throwing his prestige... behind... tax cuts.... Has President Bush been so damaged by scandals and public disapproval that he has no choice but to appoint qualified, principled people to important positions? O.K., seriously, many economists and investors feared that Mr. Bush would try to place a highly partisan figure in charge of the Fed. And ... there was widespread concern that Mr. Bush would try to select a John Snow type - a businessman whose only qualification is loyalty....

So should we all feel confident.... Alas, no.... Mr. Greenspan, for all his flaws, has repeatedly shown his ability to divine from fragmentary and sometimes contradictory data which way the economic wind is blowing. As an academic, Mr. Bernanke never had the occasion to make that kind of judgment. We'll just have to see whether he can develop an economic weather sense on the job....

[But] my main concern is that the economy may well face a day of reckoning soon after Mr. Bernanke takes office. And while he is surely the best politically possible man for the job (all the other candidates I would have been happy with are independents or Democrats), coping with that day of reckoning... may be beyond anyone's talents... two unsustainable trends: a huge surge in house prices and a vast inflow of funds from Asia. Sooner or later, both trends will end, possibly abruptly....

When all is said and done, the Fed controls only one thing: the short-term interest rate. And it will be a long time before we have competent, public-spirited people controlling taxes, spending and other instruments of economic policy.

Paul Krugman worries about the problems that Bernanke will have to face, and about the fact that he will be virtually the only grownup in the economy's control room for a while. I worry too. Why, I remember last summer nearly getting out the flamethrower when a reporter referred to the Fed Chairship as a "plum job." It carries a healthy (although not absurd) salary. But it also carries great responsibility. And it does not carry the power that should come with that much responsibility.

From what I hear, it does seem likely that Krugman is right when he speculates that the reaction to Harriet Miers saved us from a Harriet Miers-like Fed appointment. All the whispering over the summer about how the establishment consensus candidates--Hubbard, Feldstein, Bernanke, Kohn, Ferguson--were good but not great sounded and sounds as though it was meant to prepare the ground for somebody else.


(1) I would say that Bernanke has the standard economist's attitude toward supply-side factors: taxes carry excess burdens, the ruling principle is to broaden the base and lower the rates, budgets should not be grossly unbalanced, and public finance ought to be an empirical, technocratic discipline rather than one of religious zealotry. He does, however, occasionally talk about financial crises and the chains of bankruptcy and disintermediation that they generate as "supply-side" factors. I understand what he means, but I do still find it a little jarring.

Posted by DeLong at October 31, 2005 08:58 AM