Putting the 'Ph' back in Bernanke's PhD?

8/15/2012 03:07:00 PM
My econoblog reader feed has been inundated as of late with stories about Mitt Romney and Paul Ryan. While obviously I care about the election and the candidates therein, there seems now to be a dearth of genuine economic debate. Whatever happened to those delightfully wonkish debates over the use of Hodrick-Prescott filters or microfoundations? At any rate, considering the election is likely to result in more legislative gridlock, I honestly don’t see the presidential election being the primary determinant of the path of recovery.

Allow me then to showcase a Bloomberg piece on Bernanke from last week, someone who actually holds some reins of power for the US and world economies. They say economic data is like a particularly boring form of science fiction. Ben seems to have taken that to heart in his turn from the scientific to the philosophical, as he proclaims the field’s “ultimate purpose” to be “understand and promote the enhancement of well-being.”
Now the chairman’s words do reflect an excellent point: that beyond ensuring our measurements are correct, we must be certain the set of measurements we take answers the right questions. Referring to GDP and inflation, Bernanke says “Aggregate statistics can sometimes mask important information… We should see better and more direct measurements of economic well-being.”

It’s easy to suppose why Bernanke is taking such a meta-critical view of the profession. The failure to predict the turmoil of 2007 and beyond and to recommend remedy in unison illustrates the disarray that dominates the field. Furthermore, criticism of central economic premises, such as individual rationality and the impersonal nature of exchange, persisted long before the latest crisis.

And indeed, narrow-minded focus on aggregate data does not with any certainty produce that ultimate goal of economic well-being policymakers seek. Singapore comes to mind, that Southeast Asian city-state with the world’s third highest per-capita GDP. While Singapore fares quite well by standard metrics, even earning the best quality-of-life ranking in Asia, visitors report a pervasive sense of hollowness, fakeness, or shallowness to the culture. Upon hearing news that a convicted drug trafficker would be executed, Wired writer William Gibson, who had been visiting the country, deemed it “Disneyland with the Death Penalty.” His famous piece of the same name is a gripping read, and gives the reader a sense of what life is like in a land where utilitarian-driven policymaking has run amok.

That said, America is hardly in danger of becoming Singapore (serious counter-cyclical fiscal policy would have to have been on the menu). I think Bernanke’s philosophical turn rather belies his own insecurities about his tenure as Fed Chief. Since the crisis, Ben has been trying oh-so-hard to walk a fine line between active and hands-off approaches. While he’s kept rates near zero and engaged in QE twice, he is also refusing to budge any further despite an economy that has “decelerated” from already anemic growth and below-target inflation. The Atlantic monthly encapsulated his internal conflict back in April by running a piece on him titled both “The Hero” and “The Villain.” It is incredible that a Fed Chief who’s done so much on such an historic scale has still fallen short in bringing the economy back to full employment.

What’s holding Ben back? “I’d feel much more comfortable if Congress would take some of this burden from us,” he said in June, with apparent naïveté. If the President’s abortive Jobs Act push last year was any signal, Congress has no appetite for new stimulus, and this reality should be obvious. Thus it’s hard to see Bernanke’s ‘philosophical’ push as much more than an attempt at distraction. His job is to minimize unemployment and stabilize prices. Whether these are the ultimate goals of policy or not, they are the responsibility with which he is charged, and both are pleading for additional Fed action. So while Bernanke makes a good point about the nature of economic study, I’m guessing this erudite realization is just something to help him sleep better. After all, he surely knows prolonged, widespread unemployment carries a hefty price tag in terms of human costs. We don’t need a ‘happiness’ measure to tell us that.
Matthew Martin 8/16/2012 07:54:00 AM
Bernanke's sudden pivot to concern over "well-being" instead of unemployment is alarming. Maximizing employment is only welfare-harming if you believe that those without jobs are unemployed not because they can't find work, but because they don't want to.