Ben Bernanke recently used a golf metaphor to describe monetary policy:
In remarks simply titled “Gradualism,” then-Governor Bernanke explained the case for policymakers “to move slowly and cautiously” when they can’t be sure about the consequences. He cited a classic 1967 article by Brainard, a Yale economist, who “showed that when policymakers are unsure of the impact that their policy actions will have on the economy, it may be appropriate for them to adjust policy more cautiously and in smaller steps than they would if they had precise knowledge of the effects of their actions.”
Then he gets into miniature golf:
“Imagine that you are playing in a miniature golf tournament and are leading on the final hole. You expect to win the tournament so long as you can finish the hole in a moderate number of strokes. However, for reasons I won’t try to explain, you find yourself playing with an unfamiliar putter and hence are uncertain about how far a stroke of given force will send the ball. How should you play to maximize your chances of winning the tournament?
“Some reflection should convince you that the best strategy in this situation is to be conservative. In particular, your uncertainty about the response of the ball to your putter implies that you should strike the ball less firmly than you would if you knew precisely how the ball would react to the unfamiliar putter. This conservative approach may well lead your first shot to lie short of the hole. However, this cost is offset by the important benefit of guarding against the risk that the putter is livelier than you expect, so lively that your normal stroke could send the ball well past the cup. Since you expect to win the tournament if you avoid a disastrously bad shot, you approach the hole in a series of short putts (what golf aficionados tell me are called lagged putts). Gradualism in action!”
That’s way too gradual. Bernanke is playing something closer to electronic golf. After each practice swing in Wii, the likely distance the ball will travel is shown on the computer screen. The practice swings are the recent policy statements by Fed officials. The reactions of markets (everything from stocks to TIPS spreads) show us the likely effects. Yes, there is a circularity problem here–but at least it gives us a ballpark estimate. And the Fed’s still not swinging hard enough.
Target the forecast! Set monetary policy at a level expected to produce desired growth in AD. We’re still far from that level. I hope Bernanke doesn’t choke under the pressure. I hope he remembers what he told the Japanese a few years back:
Needed: Rooseveltian Resolve
Franklin D. Roosevelt was elected President of the United States in 1932 with the mandate to get the country out of the Depression. In the end, the most effective actions he took were the same that Japan needs to take—-namely, rehabilitation of the banking system and devaluation of the currency to promote monetary easing. But Roosevelt’s specific policy actions were, I think, less important than his willingness to be aggressive and to experiment—-in short, to do whatever was necessary to get the country moving again. Many of his policies did not work as intended, but in the end FDR deserves great credit for having the courage to abandon failed paradigms and to do what needed to be done.
Japan is not in a Great Depression by any means, but its economy has operated below potential for nearly a decade. Nor is it by any means clear that recovery is imminent. Policy options exist that could greatly reduce these losses. Why isn’t more happening? To this outsider, at least, Japanese monetary policy seems paralyzed, with a paralysis that is largely self-induced. Most striking is the apparent unwillingness of the monetary authorities to experiment, to try anything that isn’t absolutely guaranteed to work. Perhaps it’s time for some Rooseveltian resolve in Japan.