Ben Bernanke's new memoir, The Courage to Act, is a fantastic and reasonably accessible introduction to the economic thought of a former Federal Reserve Chair who was a leading academic economist before serving in government. But it doesn't really make news or offer gossipy new scoops about the financial crisis and other major newsworthy events that Bernanke was involved with.
It does, however, feature a brief — but very intriguing — discussion of a proposal the Federal Reserve discussed in 2011. It's an idea called "NGDP targeting," which a libertarian economist named Scott Sumner has popularized on the internet and which has won the allegiance of everyone from former Obama adviser Christina Romer and liberal economist Paul Krugman to the Economist and conservative pundit Ramesh Ponnuru. Michael Woodford, a Columbia University professor who's the author of the leading graduate-level textbook on monetary economics, is also a fan.
We already knew that Bernanke and his colleagues considered the idea and rejected it. But the book adds some interesting context — some from its account of the meeting, some from Bernanke's reflections on an old paper he wrote about Japan — for understanding that rejection. Bernanke, it seems, thought this proposed means of boosting the economy was unworkable. Not for any of the kinds of technical reasons that someone like Woodford would care about, but for essentially political reasons.
Bernanke didn't doubt that the Fed could, in theory, do more to address the then-acute problem of mass unemployment. The problem, in his view, was that the public — and, more importantly, Congress — would be angered by further action in a way that would be a problem for the Fed as an institution and would undermine the efficacy of the initiative anyway. Reading between the lines, Bernanke seems to believe that a better monetary policy regime is possible, but only with support from elected officials.
What is NGDP targeting?
To grasp the significance of what Bernanke says about NGDP targeting, all you really need to know is that it's an unconventional strategy that many distinguished outside observers believe the Federal Reserve could have used to reduce unemployment more rapidly.
In his book, Bernanke agrees that NGDP targeting would work in theory and describes the practical problems with doing it as essentially political in nature. He doesn't raise any technical objections, so the full technical details aren't crucially important to understanding this part of the book. But if you're interested, the best way to understand NGDP targeting is in contrast with inflation targeting.
Right now the Federal Reserve, like most other major central banks, defines its mission in terms of an inflation target — it aims for a long-term trend of 2 percent growth in the personal consumption expenditures deflator.
The NGDP targeting proposal is that the Fed should instead target a growth rate (usually conceived of as 4 or 5 percent) in the level of total economic output before adjusting for inflation. You can think of NGDP as the total level of spending in the economy. Equivalently, it's the total level of income earned in the economy. The idea is that if the central bank prints more money, nominal spending will go up. If it prints less money, nominal spending will go down. By stabilizing the growth rate of nominal spending, the central bank couldn't prevent all bad things from happening. But it could ensure that "bad times" means a temporary increase in the inflation rate rather than the kind of huge surges in unemployment associated with today's recessions.
There are a variety of theoretical arguments for NGDP targeting over inflation targeting, but it's gained steam as a policy proposal in the wake of the Great Recession for an essentially practical reason. Central banks' current practice of fighting inflation with higher interest rates and fighting recessions with lower interest rates has run aground recently on the fact that interest rates can only go so low. Banks have cut rates all the way down to zero and have still seen their economies experience slow job growth and weak inflation. NGDP targeting does away with that lower bound problem, and that's why it's moved off academic bookshelves and into policy discussions.
What's Ben Bernanke's case against NGDP targeting?
Much of Bernanke's pre-Fed writing and academic work can be understood as broadly sympathetic to the NGDP targeting proposal, though he doesn't really address it explicitly. In his memoir, he for the first time lays out his full thinking. I have added some helpful margin notes:
This discussion is notable both for its brevity and for what it doesn't say — he doesn't really take issue with the analysis of Sumner, Romer, Woodford, or anyone else who thinks NGDP targeting is, in principle, a superior framework. He just raises practical objections, based on his experience actually running the Fed.
The recurrence of Congress as a theme, and Bernanke's doubt that NGDP targeting would even be "feasible" whatever the "theoretical benefits," is telling. Bernanke is saying that he thought an attempt to switch to NGDP targeting would lead to a political backlash and that his preference for avoiding this backlash isn't just a question of cowardice — it would be pointless to even try to announce the change, because the scale of the backlash would render it non-credible.
Bernanke's argument isn't entirely convincing
Of course, it's difficult to know. NGDP targeting is hard to explain to the mass public. But then again, it's not like inflation targeting is particularly well-understood. In some respects, NGDP is a much easier concept to grasp — the government simply counts every dollar spent (or every dollar earned) and then adds it all up. Inflation raises a lot of deep conceptual issues, like whether to use a chained or unchained price index, how to measure quality improvements, how to handle innovative new products, how to calculate the price of housing in a country where most people live in owner-occupied homes, and what to say about highly unstable fluctuations in global commodity prices.
It's even possible that the politics would work the other way. The Fed's current goal of 2 percent inflation implies that sometimes — often during a severe recession — the Fed has to take action to raise prices, which is going to sound like a terrible idea to most ordinary voters. On the other hand, if the Fed says it's taking action to raise incomes, that might make intuitive sense to the public.
But Bernanke's broader point about Congress seems true.
At the time, the Fed was already facing a large and growing chorus of criticism, largely from the right, for its efforts to stabilize the economy. Under the circumstances, defending the status quo was politically easier than defending an unfamiliar new change would have been.
But Bernanke's broadest point of all — that he didn't just shy away from a fight, but that doing otherwise would have been futile — seems at least debatable. The title of his book, after all, is The Courage to Act, and the entire point of having the Fed be an operationally independent central bank is that its leadership can be at least somewhat indifferent to congressional criticism. Bernanke has a reputation for politeness, and his book is exceptionally polite to most of his critics and adversaries. He's clearly not the kind of person who would have been well-suited to conduct a giant fight with hard money advocates in Congress. But it's at least possible that someone else could have waged such a fight successfully and done the country a lot of good.
Stronger political leadership could have made a difference
Back in 1999, Bernanke criticized the Bank of Japan's unwillingness to act more robustly to bolster the Japanese economy. He said the BOJ's leadership needed to show "Rooseveltian resolve" and model itself on the kind of boldness seen in 1933 in the United States, when FDR and the Federal Reserve broke the dollar's link to gold and successfully reflated the economy.
In the book, Bernanke revisits that criticism. He stands by the substance but says he regrets the "sometimes harsh" tone he took.
"Years later," he writes, "having endured withering, motive-impugning criticism from politicians, editorial pages, and even fellow economists I found myself wishing I had dialed back my earlier rhetoric."
Yet despite the apologies, Bernanke observes that "the Bank of Japan would adopt my suggestions some fourteen years later."
What he doesn't say is that this came about not because white papers from American academic macroeconomists suddenly became more persuasive. It came about because Japan finally got its Franklin Roosevelt, in the form of Prime Minister Shinzo Abe — a politician and elected official able to win a mandate for change. By the same token, most observers agree that Ronald Reagan's backing of Paul Volcker was important to letting Volcker's sometimes-controversial strategy for fighting inflation work.
Reading between the lines, one can see the implication that Bernanke believes the Fed could have done more to boost the economy had there been more political support for additional action. But while the Fed faced significant political pressure from congressional Republicans to do less to bolster the economy, neither Barack Obama nor congressional Democrats were very interested in offering pressure from the other side. Before serving as Fed chair, Bernanke thought that central bankers alone could and should demonstrate "Rooseveltian resolve." After doing the job, he seems to have adopted a more complicated view of the politics of central banking and now thinks leadership from elected officials is required — leadership that did not exist during his tenure but that new activist groups like Fed Up are trying to create.