The Feckless Fed
By PAUL KRUGMAN
Back in 2002, a professor turned Federal Reserve official by the name of Ben Bernanke gave a widely quoted speech titled "Deflation: Making Sure 'It' Doesn't Happen Here." Like other economists, myself included, Mr. Bernanke was deeply disturbed by Japan's stubborn, seemingly incurable deflation, which in turn was "associated with years of painfully slow growth, rising joblessness, and apparently intractable financial problems." This sort of thing wasn't supposed to happen to an advanced nation with sophisticated policy makers. Could something similar happen to the United States?
Not to worry, said Mr. Bernanke: the Fed had the tools required to head off an American version of the Japan syndrome, and it would use them if necessary.
Today, Mr. Bernanke is the Fed's chairman — and his 2002 speech reads like famous last words. We aren't literally suffering deflation (yet). But inflation is far below the Fed's preferred rate of 1.7 to 2 percent, and trending steadily lower; it's a good bet that by some measures we'll be seeing deflation by sometime next year. Meanwhile, we already have painfully slow growth, very high joblessness, and intractable financial problems. And what is the Fed's response? It's debating — with ponderous slowness — whether maybe, possibly, it should consider trying to do something about the situation, one of these days.
The Fed's fecklessness is, to be sure, not unique. It has been astonishing and infuriating, as the economic crisis has unfolded, to watch America's political class defining normalcy down. As recently as two years ago, anyone predicting the current state of affairs (not only is unemployment disastrously high, but most forecasts say that it will stay very high for years) would have been dismissed as a crazy alarmist. Now that the nightmare has become reality, however — and yes, it is a nightmare for millions of Americans — Washington seems to feel absolutely no sense of urgency. Are hopes being destroyed, small businesses being driven into bankruptcy, lives being blighted? Never mind, let's talk about the evils of budget deficits.
Still, one might have hoped that the Fed would be different. For one thing, the Fed, unlike the Obama administration, retains considerable freedom of action. It doesn't need 60 votes in the Senate; the outer limits of its policies aren't determined by the views of senators from Nebraska and Maine. Beyond that, the Fed was supposed to be intellectually prepared for this situation. Mr. Bernanke has thought long and hard about how to avoid a Japanese-style economic trap, and the Fed's researchers have been obsessed for years with the same question.
But here we are, visibly sliding toward deflation — and the Fed is standing pat.
What should it be doing? Conventional monetary policy, in which the Fed drives down short-term interest rates by buying short-term U.S. government debt, has reached its limit: those short-term rates are already near zero, and can't go significantly lower. (Investors won't buy bonds that yield negative interest, since they can always hoard cash instead.) But the message of Mr. Bernanke's 2002 speech was that there are other things the Fed can do. It can buy longer-term government debt. It can buy private-sector debt. It can try to move expectations by announcing that it will keep short-term rates low for a long time. It can raise its long-run inflation target, to help convince the private sector that borrowing is a good idea and hoarding cash a mistake.
Nobody knows how well any one of these actions would work. The point, however, is that there are things the Fed could and should be doing, but isn't. Why not?
After all, Fed officials, like most observers, have a fairly grim view of the economy's prospects. Not grim enough, in my view: Fed presidents, who make forecasts every time the committee that sets interest rates meets, aren't taking the trend toward deflation sufficiently seriously. Nonetheless, even their projections show high unemployment and below-target inflation persisting at least through late 2012.
So why not try to do something about it? The closest thing I've seen to an explanation is a recent speech by Kevin Warsh of the Fed's Board of Governors, in which he declared that doing what Mr. Bernanke recommended back in 2002 risked undermining the Fed's "institutional credibility." But how, exactly, does it serve the Fed's credibility when it fails to confront high unemployment, while consistently missing its own inflation targets? How credible is the Bank of Japan after presiding over 15 years of deflation?
Whatever is going on, the Fed needs to rethink its priorities, fast. Mr. Bernanke's "it" isn't a hypothetical possibility, it's on the verge of happening. And the Fed should be doing all it can to stop it.
Redo That Voodoo
By PAUL KRUGMAN
Republicans are feeling good about the midterms — so good that they've started saying what they really think. This week the party's Senate leadership stopped pretending that it cares about deficits, stating explicitly that while we can't afford to aid the unemployed or prevent mass layoffs of schoolteachers, cost is literally no object when it comes to tax cuts for the affluent.
And that's one reason — there are others — why you should fear the consequences if the G.O.P. actually does as well in November as it hopes.
For a while, leading Republicans posed as stern foes of federal red ink. Two weeks ago, in the official G.O.P. response to President Obama's weekly radio address, Senator Saxby Chambliss devoted his entire time to the evils of government debt, "one of the most dangerous threats confronting America today." He went on, "At some point we have to say 'enough is enough.' "
But this past Monday Jon Kyl of Arizona, the second-ranking Republican in the Senate, was asked the obvious question: if deficits are so worrisome, what about the budgetary cost of extending the Bush tax cuts for the wealthy, which the Obama administration wants to let expire but Republicans want to make permanent? What should replace $650 billion or more in lost revenue over the next decade?
His answer was breathtaking: "You do need to offset the cost of increased spending. And that's what Republicans object to. But you should never have to offset the cost of a deliberate decision to reduce tax rates on Americans." So $30 billion in aid to the unemployed is unaffordable, but 20 times that much in tax cuts for the rich doesn't count.
The next day, Mitch McConnell, the Senate minority leader, confirmed that Mr. Kyl was giving the official party line: "There's no evidence whatsoever that the Bush tax cuts actually diminished revenue. They increased revenue, because of the vibrancy of these tax cuts in the economy. So I think what Senator Kyl was expressing was the view of virtually every Republican on that subject."
Now there are many things one could call the Bush economy, an economy that, even before recession struck, was characterized by sluggish job growth and stagnant family incomes; "vibrant" isn't one of them. But the real news here is the confirmation that Republicans remain committed to deep voodoo, the claim that cutting taxes actually increases revenues.
It's not true, of course. Ronald Reagan said that his tax cuts would reduce deficits, then presided over a near-tripling of federal debt. When Bill Clinton raised taxes on top incomes, conservatives predicted economic disaster; what actually followed was an economic boom and a remarkable swing from budget deficit to surplus. Then the Bush tax cuts came along, helping turn that surplus into a persistent deficit, even before the crash.
But we're talking about voodoo economics here, so perhaps it's not surprising that belief in the magical powers of tax cuts is a zombie doctrine: no matter how many times you kill it with facts, it just keeps coming back. And despite repeated failure in practice, it is, more than ever, the official view of the G.O.P.
Why should this scare you? On paper, solving America's long-run fiscal problems is eminently doable: stronger cost control for Medicare plus a moderate rise in taxes would get us most of the way there. And the perception that the deficit is manageable has helped keep U.S. borrowing costs low.
But if politicians who insist that the way to reduce deficits is to cut taxes, not raise them, start winning elections again, how much faith can anyone have that we'll do what needs to be done? Yes, we can have a fiscal crisis. But if we do, it won't be because we've spent too much trying to create jobs and help the unemployed. It will be because investors have looked at our politics and concluded, with justification, that we've turned into a banana republic.
Of course, flirting with crisis is arguably part of the plan. There has always been a sense in which voodoo economics was a cover story for the real doctrine, which was "starve the beast": slash revenue with tax cuts, then demand spending cuts to close the resulting budget gap. The point is that starve the beast basically amounts to deliberately creating a fiscal crisis, in the belief that the crisis can be used to push through unpopular policies, like dismantling Social Security.
Anyway, we really should thank Senators Kyl and McConnell for their sudden outbursts of candor. They've now made it clear, in case anyone had doubts, that their previous posturing on the deficit was entirely hypocritical. If they really do have the kind of electoral win they're expecting, they won't try to reduce the deficit — they'll try to make it explode by demanding even more budget-busting tax cuts.
"Now it is simply Truth or Consequences: Self-Indulgent Illusions / Delusions are simply annihilating the Future of Humanity." SL
Self-Indulgent Illusions / Delusions are simply annihilating the Future of Humanity." SL
"The Function of Peace Makers is to Radically Pay the Price to Accelerate Learning; no matter the personal Price." SL, Disciple of Jesus
"The Function of Peace Makers is to Radically Pay the
Price to Accelerate Learning; no matter the personal Price."
SL, Disciple of Jesus
Americans do what's right." Paraphrase
for Standing for the Needy." SL
"I find cesspool overflow inherently disgusting; over-privilege too; as did Jesus. This is simply how Love is. Or it is not Love " SL
over-privilege too; as did Jesus.
This is simply how Love is. Or it is not Love " SL
my country cares not, and I'd happily die." SL
"Greed for Pleasure is Self-Medication of the Agony of Meaninglessness, Self-Selected, Societally Imposed - Joylessness." SL
or Masturbation." SL
Why sex rich then? Sex is MUCH MORE ADDICTIVE.
The Muslims are more correct than we westerners in this.
Lusting is the opposite of Loving.
Lusting is the opposite of Peace Making." SL
and more so our Self-Righteous Quest for Over-Privilege,
infinitely more deadly." SL
"If you allow others to Lead your life, you are NOT aLive." SL
from Indonesia. Some needed a translator who was with them.
Within 90 seconds the 25 or so were sitting in wrapped attention
in a tight circle around me. We went on for 15 min or so
until the adults had to drag them away. As always we spoke
about the vigil and its issues - very, very deep, and that
our purpose here is not to entertain ourselves, but to totally
devote ourselves to the suffering of the neediest - and the
reward for that is Joy; and that WE, not our elected
representatives, are The Government, if we'll only show up
to do our Job.
A Sacred Privilege it was to speak with them.
One of their adult handlers came to me afterwords - "yours
is EXACTLY the message we needed for them to hear. Thank you."
What a privilege.