Monetary stimulus isn't "treason." It's Ben Bernanke's job. And it's high time for the Fed chair to do it.
The U.S. economy is in bad shape. A growing pile of economic data--slow GDP growth, falling employment, falling consumption--only confirms what more than twenty million people who can't find full-time jobs already know. Yet Congress and the White House are unable or unwilling to do anything about it. As spending from the 2009 stimulus bill peters out, fiscal policy is hurting the economy, and the Republicans' unanimous insistence on spending cuts is keeping it that way.
But some Republicans are not content with preventing fiscal policy from reducing unemployment. They also want to intimidate the Federal Reserve--a historically independent agency--from using monetary policy to reduce unemployment. Yesterday presidential hopeful Texas Governor Rick Perry said that it would be "treasonous" for Ben Bernanke to "print money" to attempt to stimulate economic growth.
The Fed has a dual mandate to protect both employment and prices. They're doing abysmally at the first.
In these economic circumstances, "printing money" is Ben Bernanke's job. The Federal Reserve has a famous dual mandate: maximum employment and stable prices. Right now, they're doing fine at one and abysmally at the other. This chart shows excess unemployment for the past sixty years: the difference between the unemployment rate and the "natural" rate of unemployment estimated by the CBO (currently 5.2 percent). The only other time excess unemployment climbed above 4 percent, in 1982, it fell back below 2 percent within five quarters. This spring was the ninth quarter since excess unemployment first passed 4 percent, and it's still at 3.9 percent. The Fed itself estimates it will be well above 3 percent through the end of this year.
As for inflation, although Rick Perry says that monetary expansion is "devaluing the dollar in your pocket," every indicator available shows that inflation is low. After a slight uptick due to commodity prices earlier this year, it has settled down again, with two-year inflation expectations at only one percent. So why isn't the Fed doing more to reduce unemployment?
THE FEDERAL RESERVE VS. 'POLITICS'
The traditional worry about central banks is that they will be too willing to stimulate the economy, since everyone likes growth and no one likes a recession. In particular, the fear was that if central bankers took orders from elected officials like the president or Congress, it would stimulate the economy before every election, potentially creating an inflationary spiral. This is why the Federal Reserve is so independent of the rest of the government--so it can take action against inflation, even when the executive and legislative branches want more growth.
What's bizarre today is that we're seeing exactly the opposite of the traditional fear. Unemployment is high, the economy is stuck, and all the president and Congress can talk about is deficit reduction. In this situation, the Fed's independence should be a virtue: Ben Bernanke should be saying, "I know all those politicians have lost their minds, but I'm going to do what's right: I'm going to save the economy."
That's exactly what Rick Perry is afraid of--that Bernanke will help the economy--because he knows that a bad economy is his best shot at becoming president. And that's why he's playing politics with the Federal Reserve (using the strange non-logic that if Bernanke just does his job and follows the dual mandate, he's the one who is playing politics).