If Federal Reserve Chairman Ben Bernanke had a theme song, it would be Meat Loaf's 1978 classic "Two Out of Three Ain't Bad."
The central bank says it has a trio of missions. The Fed "sets the nation's monetary policy to promote the objectives of maximum employment, stable prices, and moderate long-term interest rates."Long-term interest rates are near record lows, inflation is under control, and prices are stable, but maximum employment remains a far-off dream. In a speech earlier this month, Bernanke noted that "in all likelihood, a significant amount of time will be required to restore the nearly 8-1/2 million jobs that were lost nationwide over 2008 and 2009." In another recent speech in Michigan, he acknowledged that "high unemployment imposes heavy costs on workers and their families, as well as on our society as a whole." But he doesn't seem inclined to do anything about it. The Federal Open Market Committee this week stood pat on monetary policy and announced no additional efforts or initiatives to combat persistent high unemployment.
Could Bernanke go down in history as the Federal Reserve chairman who won the crisis but lost the recovery? If I were in Congress, in the White House, or at the Fed, and we were facing 9.7 percent unemployment, my hair would be on fire. In May, according to the Bureau of Labor Statistics, 6.8 million Americans had been out of work for more than a half a year, up 67 percent from May 2009. As this table shows, the long-term unemployed account for 46 percent of the total unemployed, up from 28 percent a year ago. Incumbents, in both parties, at every level, will be judged in large measure on how they combat this. That includes the Federal Reserve chairman. When the crisis hit, as David Wessel showed in In Fed We Trust,Bernanke acted with courage, urgency, and imagination. He used all the Fed's powers, and some it may not have possessed, to avert collapse. His actions won him reappointment to a second term.
But he's showed no such urgency in grappling with high unemployment. Why? There's no shortage of explanations. It could be ideology. Around the world, central bankers seem much more worried about inflation than slow growth. It could be a class issue. Federal Reserve Governors and tenured Ivy League economists simply don't know many people who are unemployed. It could be political. Bernanke is a Republican, and perhaps he'd secretly like this Democratic White House and Democratic Congress to fail. It could be a sense of modesty. He might believe that it's not appropriate for the Fed to go beyond its traditional scope of activities and to lend moral support for legislative action and fiscal policy that he favors.
Given Bernanke's record, none of these explanations is compelling. He's pushed a more expansionary monetary policy than any central banker in the world and has avoided the self-destructive and increasingly belligerent austerity seen in Europe. He's been pragmatic and has worked well with both parties. And he hasn't shied away from suggesting that Congress take certain actions. In congressional testimony earlier this month, he called the U.S. debt unsustainable (translation: cut spending) and didn't urge Congress and the White House to pursue new job-creation efforts. Asked about the need for more stimulus, Bernanke was noncommittal.
I think there are two more compelling explanations. First, it could be that Bernanke and the Fed are simply exhausted. In 2008 and 2009, the central bank did everything in its power and then some to rescue the economy from depression. It took rates to zero, lent directly to companies, and expanded the Fed's balance sheet massively. More recently, it has bought $1 trillion of mortgage-backed securities to prop up the ailing housing market. The Fed used up all its resources saving the system. Now it's time for the political system and the private sector to do their thing.
Second, it could be a failure of imagination. In recent years, Bernanke and the Federal Reserve have proved themselves to be poor predictors of how big macroeconomic trends—low interest rates, unregulated subprime lending, the rampant use of derivatives—can have negative social, economic, and political impacts. Whether it was forecasting continued growth as the economy was about to slip into recession, or underestimating subprime losses, Bernanke hasn't shown much clairvoyance. So perhaps it's not surprising that the Fed doesn't see how persistent long-term unemployment can erode labor force skills. Or that it doesn't fully grasp how a spell of high long-term unemployment—something we haven't seen in more than a generation—can harm the economy at large. Unemployment is bad for the unemployed—duh! But persistent excess capacity in the labor force limits the ability of workers at all levels to get higher wages and better benefits. It's bad for government finances, as payroll taxes provide an important source of revenue. It's bad for the housing market and for the financial sector as a whole: People with jobs are less likely to fall behind on loans. And it undermines consumer spending, which accounts for 70 percent of economic activity.
And yet, expecting this Fed to have a sense of urgency about the unemployment rate may be as futile as looking for a Cadillac at the bottom of a Cracker Jack box.
Meatloaf's "Two Out of Three Ain't Bad" is my choice for a theme song for Bernanke's Fed. What's yours? And how about the Greenspan Era? Megadeth's "Symphony of Destruction"? "What's New, Mr. Magoo?" Post your nominations in the comments, or e-mail to firstname.lastname@example.org.
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