Monday, April 30, 2012

Professor Krugman on Chairman (Professor) Bernanke

I don't agree with Paul Krugman often; although when  he focuses on economics rather than politics, the odds of agreement increase.  The New York Times published an excerpt from Krugman's new book concerning Ben Bernanke.  As an aside--Bernanke was chair at Princeton when Krugman moved to Princeton.  Krugman argues that Chairman Bernanke should listen to Professor Bernanke.  Bernanke's scholarly work centered on the Great Depression, and he is considered one of the leading experts on the causes and consequences of the Great Depression.  He also wrote about Japan's economic woes that began in the 90s, and urged the Bank of Japan to be more aggressive.  He suggested several things that the Bank of Japan could have done but didn't.  Krugman notes that Bernanke's Fed has also not done some of these earlier recommendation. 
I am less confident on the Fed's ability to do more than it has than Krugman, but he may be correct that the Fed has been too timid.  It is curious that Bernanke has not attempted policies he recommended while an academic.  Krugman offers a couple of reasons why Bernanke may be more cautious in his article.  One is that he is adapting to political pressures. While it is true the Fed is supposed to be independent of political considerations, Fed officials also know that Congress can change the rules.  Another is that the Fed bureaucracy got to Bernanke when he was newly on the Board.
I think a third possibility exists.  It is one thing to write academic papers and make recommendations.  It is another to implement untried policies in the real world where unintended and unknow consequences may follow.  A former professor of mine left academia and became an economist for a business. I saw him a couple of years later, and he commented that it often was daunting.  As he put it, "It's tougher when real dollars at stake and not hypothetical dollars represented by a diagram on a blackboard."
Krugman's article can be found here.

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