Resistance to Fed policy is futile, Professor Krugman.
Over the weekend, we got a preview of Paul Krugman's new book, which has the not-very-subtle title "End this Depression Now!" Yep, that's an exclamation point, perhaps the first ever in the title of a book by a Nobel Prize winner. And yep, Krugman doesn't think we're in a recession. He's calling it a Depression, and yes, I've dutifully capitalized that scary word.
The excerpt appeared in the New York Times Magazine, the pages of which Krugman has taken to from time to time when he wants to lay out a more involved argument than the column inches he's allotted on the NYT's op-ed page will allow. It also appeared just a few days before the Federal Reserve's Open Market Committee met to decide on the direction of U.S. monetary policy.
Bernanke effectively hired Krugman, when Bernanke ran the economics department at Princeton. And Krugman clearly thinks that Princeton Bernanke was a much different economics guy than Chairman Ben. And when I say "much different," what I mean is that Krugman has no qualms about going out on a very long limb here. Like far enough to bring out the "Star Trek" comparisons.
I'm not kidding, and I'm not talking about Captain Kirk. We're talking "Next Generation," specifically the most terrifying moment that most Star Trek fans have ever experienced: the forced assimilation of starship Enterprise Captain Jean-Luc Picard into the cybernetic hive-mine species, the Borg. Bottom line is that Krugman is very far from happy with how Locutus of Fed has dealt with the economy, particularly the problem of high unemployment:
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.
For his part, Bernanke forcefully denies this. He did so emphatically at his press conference yesterday (see below), when questioned about his academic excoriations of the Bank of Japan and its struggles in the 1990s, as the Japanese economy fell into deflation. Bernanke insists that he criticized the actions of Japan's central bank in the '90s because the country was already experiencing deflation. From his comments yesterday, you'd conclude that he doesn't advocate that the Fed do what he recommended the Bank of Japan do because he doesn't think the U.S. is dealing with deflation (which is basically a collapse of prices, including debt pricing, that can keep an economy down...well, maybe forever, if the spiral gets bad enough).
That said, Bernanke sounds a lot like a typical conspiracy theorist Fed central banker when he insists that the Fed has invested too much in the "asset" of its low-inflation credibility to do more to speed the decline of unemployment. For decades, Fed critics have maintained that the institution puts the interests of the finance industry above those of labor by keeping inflation low to ensure the future integrity of debt (inflation erodes the future value of debt, favoring the interests of creditors over debtors).
This is more than a spat. It's a battle of economic titans. Krugman has fired an impressive opening shot, using a memorable slice of pop culture in the process. Bernanke has sort of fired back, saying that a higher inflation target than the current 2 percent — say 4 percent — would be "reckless."
Not exactly "resistance is futile." But that's not something you would ever expect from Gentle Ben, even if he is Locutus of Fed. So who is Krugman in all this? Mister Data with a beard?