Bernanke Takes On Krugman’s Criticism Ignoring Own Advice

April 26 (Bloomberg) -- In today's "Movers & Shakers" Bloomberg's Erik Schatzker reports that Federal Reserve Chairman Ben Bernanke took on Nobel prize-winning economist Paul Krugman yesterday and called his advice to reduce unemployment by boosting inflation “reckless.” He speaks on Bloomberg Television's "Inside Track." (Source: Bloomberg)

Federal Reserve Chairman Ben S. Bernanke took on Nobel prize-winning economist Paul Krugman yesterday and called his advice to reduce unemployment by boosting inflation “reckless.”

“The question is, does it make sense to actively seek a higher inflation rate in order to achieve” a slightly faster reduction in the unemployment rate, Bernanke said yesterday to reporters after a Federal Open Market Committee meeting. “The view of the committee is that that would be very reckless.”

Krugman, whom Bernanke hired at Princeton University in 2000 when he was chairman of the economics department, said in a New York Times Magazine article that the Fed should raise its 2 percent inflation target to cut unemployment. Such a policy shift would align with Bernanke’s comment in 2000 that the Bank of Japan (8301) should pursue faster inflation to escape deflation, he said. Japan’s consumer prices fell 0.2 percent that year.

“While the Fed went to great lengths to rescue the financial system, it has done far less to rescue workers,” Krugman wrote. “Higher expected inflation would aid an economy” because it would persuade investors and businesses “that sitting on cash is a bad idea,” Krugman said.

Bernanke, during yesterday’s press conference in Washington, denied that the FOMC’s policy contradicts his prior academic work. The chairman spoke in response to a reporter’s question referring to Krugman’s story, titled “Earth to Ben Bernanke,” published April 24. The article cited “the divergence between what Professor Bernanke advocated and what Chairman Bernanke has actually done.”

Photographer: Andrew Harrer/Bloomberg

Ben S. Bernanke chairman of the U.S. Federal Reserve. Close

Ben S. Bernanke chairman of the U.S. Federal Reserve.

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Photographer: Andrew Harrer/Bloomberg

Ben S. Bernanke chairman of the U.S. Federal Reserve.

‘Completely Consistent’

“So there’s this view circulating that the views I expressed about 15 years ago on the Bank of Japan are somehow inconsistent with our current policies,” Bernanke said. “That is absolutely incorrect. My views and our policies today are completely consistent with the views that I held at that time.”

Krugman didn’t respond to telephone and e-mail messages to his publicist, Sarah Fogarty.

Bernanke said the main difference between Japan’s economic slump 15 years ago and the U.S. today is that Japan was in deflation and the world’s largest economy isn’t, with an inflation rate that’s close to the Fed’s objective.

The U.S. today doesn’t face a deflation threat, in part because the Fed expanded its balance sheet to $2.88 trillion through $2.3 trillion in bond purchases, Bernanke said. The FOMC yesterday raised its estimate for the personal consumption expenditures price index for this year to 1.9 percent to 2 percent versus 1.4 percent to 1.8 percent in January.

Inflation, Deflation

Bernanke said pushing the increase in prices above the Fed’s 2 percent goal would risk undermining inflation expectations and erode the central bank’s credibility as a force for stable prices.

“There are academics who have suggested that the Fed actively seek very high inflation for a couple of years,” said Laurence Meyer, senior managing director at Macroeconomic Advisers LLC in St. Louis and a former Fed governor. “Central bankers appreciate that credibility helps stabilize inflation and makes the real sector more stable. The costs of getting it back when you lose it are enormous.”

If the Fed can’t convince investors that it can contain inflation, “we would in fact have less rather than more flexibility to use accommodative monetary policy to achieve our employment goals,” Bernanke said.

‘Doubtful Gains’

“We, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation, which has proved extremely valuable in that we’ve been able to take strong accommodative actions in the last four, five years,” Bernanke told reporters. “To risk that asset for what I think would be quite tentative and perhaps doubtful gains on the real side would be, I think, an unwise thing to do.”

The Standard & Poor’s 500 Index rose 0.1 percent to 1,391.92 as of 10:16 a.m. in New York. Yields on benchmark 10- year Treasury notes slumped four basis points to 1.95 percent.

Krugman, who won the 2008 Nobel Prize in Economics, said in a blog posting on the New York Times’ opinion page yesterday that Bernanke’s response was “disappointing stuff.”

Krugman, 59, has previously proposed higher inflation to boost employment and criticized Bernanke in a Bloomberg News interview last year for not taking more aggressive action.

Bernanke, 58, joined Princeton, in New Jersey, as a professor in 1985, according to the central bank’s website. He was a member of the Fed’s Board of Governors from 2002 to 2005 and chairman of President George W. Bush’s Council of Economic Advisers from 2005 to 2006, when he took office as Fed Chairman.

“Krugman’s views are not closely related to the reality in which Bernanke is forced to operate,” said Anthony Karydakis, an adjunct professor of economics at New York University’s Leonard N. Stern School of Business and former chief U.S. economist at JPMorgan Asset Management. “One of them has the responsibility of steering the economy through treacherous waters and the other has the luxury of sitting in his office and sending articles to the New York Times,” Karydakis said.

To contact the reporters on this story: Jeff Kearns in Washington at jkearns3@bloomberg.net; Craig Torres in Washington at ctorres3@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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