THE STASH APRIL 5, 2009
I don't entirely understand this Washington Post op-ed from Simon Johnson and James Kwak. On the one hand, they seem to criticize Fed Chairman Ben Bernanke for a series of radical moves designed to prevent a deflationary spiral. "Bernanke's willingness to pump money into the economy risks unleashing the most serious bout of U.S. inflation since the early 1980s, in a nation already battered by rising unemployment and negative growth," they write.
On the other hand, they concede that Bernanke's "actions may be justified under today's circumstances" and that his "gamble looks like the worst possible alternative, apart from all the others."
Right. So why are we even having this discussion? If it's a choice between the 1930s and the late '70s/early '80s, then it's a complete no-brainer, no? I, for one, go to bed every night unbelievably thankful we have a Fed chairman as clear-eyed as Bernanke on this question. It's not hard to imagine someone in Bernanke's position (like, say, the overwhelming majority of his predecessors) so blinded by their establishment sensibilities that they're preoccupied with inflation and unwilling to combat the far, far bigger threat of deflation.
The only hint of what's really bugging Johnson and Kwak are these two grafs:
Will it work? In a normal advanced economy, creating hundreds of billions of dollars in new money would not foster runaway inflation. As long as the economy is underperforming -- for example, with high unemployment -- stimulating the economy will only cause that "slack" to be taken up, the theory goes. Only when unemployment is low again can workers demand higher wages, forcing companies to raise prices.
But is the United States really a normal advanced economy anymore? We seem to have taken on some features of so-called emerging markets, including a bloated (and contracting) financial sector, overly indebted consumers, and firms that are trying hard to save cash by investing less. In emerging markets there is no meaningful idea of "slack;" there can be high inflation even when the economy is contracting or when growth is considerably lower than in the recent past.
Is there any real evidence the U.S. is taking on features of an emerging-market economy when it comes to our monetary system? That Bernanke's actions are triggering runaway inflation rather than mitigating the slide toward deflation? That slack is no longer a useful concept when discussing the American economy? If you're going to make such a provocative claim, it needs to be supported empirically, I think. Johnson seems to be high on the emerging-market analogy, which he's used in other contexts. (And which may be a legacy of his time as IMF chief economist, when he mostly dealt with emerging economies--if you only have a hammer kind of thing...) But whatever it's value there, I have a tough time seeing it's usefulness in this discussion (again, absent hard evidence).
In any case, one still wonders what the upshot is. Suppose there were a 25 percent chance that Johnson and Kwak were right (which seems incredibly high to me)--that our monetary system functions more like that of a developing country than an advanced economy. Does that mean Bernanke should throw up his hands and resign himself to a Depression-style deflation? I just don't see where this is going.