Central bankers: They know not their own strength
By Scott Sumner
Ben Bernanke is a mild mannered and modest individual. Anyone who has read his memoir will not confuse him with Donald Trump.
During the Great Recession, Bernanke suggested that it would be helpful if fiscal authorities would help to boost aggregate demand. That might seem unsurprising, but for those who have read Bernanke’s academic work, it did raise an eyebrow. Bernanke clearly thought that the Fed’s tight money policy played a major role in the Great Depression, and he was quite dismissive of claims that the Bank of Japan lacked the ammunition to end their deflation. He basically suggested that central banks had almost limitless ammo, as long as there were more assets to buy. Bernanke’s writings on the Great Depression certainly suggested that he was the sort of person who would have the Fed do “whatever it takes” to avoid another depression, even if fiscal authorities did not contribute to the stimulus.
On the other hand, being the head of a central bank is very different from being an academic, so there is no necessary contradiction. He may have privately wished to be more aggressive, but had to work within the constraints of a large and conservative institution. For instance, Fed insiders were skeptical of level targeting, an idea that Bernanke once suggested the Japanese might consider.
The example of 2013 suggests that central bankers may not know their own strength. They warned that sudden austerity might slow the recovery, but instead the recovery sped up over the course of 2013, as easier money offset the big drop in the deficit.
Another example occurred recently in the UK. The Bank of England warned that a Brexit vote could have a very negative impact on the UK economy, even before the actual Brexit occurred (perhaps in 2019). The idea was that uncertainty created by a “yes” vote to leave the EU might sharp reduce economic growth.
As a result the BoE eased policy, or at least did enough to prevent the Brexit shock from (effectively) tightening policy, and now the BoE is saying something to the effect, “Never mind, our prediction of gloom and doom was wrong.”
That makes them look bad. But on the other hand they deserve some credit for preventing the bad thing that they predicted would happen. Indeed central banks are supposed to prevent bad things from happening to NGDP. That’s their job. I give central banks no credit for correctly predicting a bad outcome for NGDP, just as I’d give a bus driver no credit for accurately predicting that the bus would fly over the guardrail, three curves ahead. If you think something bad will happen to NGDP, then turn the &%#@$& steering wheel!
At first glance it looks like NGDP growth will actually speed up from 3.5% to just over 4%. But that’s misleading, as the inflation figures refer to the CPI, not the GDP deflator. Normally it doesn’t make much difference, but in this case the pound has plunged sharply, so imported consumer goods will soar in price. The GDP deflator inflation rate will be significantly lower, and I think it’s likely that NGDP growth will actually slow down a little bit. Still, not a bad job by the BoE.
You may recall that BoE Governor Mark Carney had said some nice things about NGDP targeting back before moving to the BoE. That’s not his official remit, but the UK’s inflation target is flexible, and he may have had steady NGDP growth in the back of his mind, as an intermediate target during a difficult and confusing period for the UK economy.
The only downside of central bank modesty is that it leads fiscal authorities to (wrongly) believe that they have a role to play in economic stabilization. Maybe we should put Trump in charge of the Fed. 🙂