It’s even worse than Yglesias believes

Here’s Matt Yglesias:

Ben Bernanke’s appearances before Congress are usually a parade of clueless questions, but Sen. Amy Klobuchar of Minnesota just asked him a great one. Noting that some members of Congress think the Fed should drop its dual mandate on inflation and unemployment and just focus on price stability, she asked Bernanke to explain what he would do differently if the mandate changed.

Bernanke hemmed and hawed a bit, but the crux of his answer was: nothing.

He seemed to interpret the question as perhaps an attack on his inflation record, but his answer was a damning attack on his growth record. (His answer starts around the 39-minute mark here.) Bernanke noted that “inflation, if anything, is a little bit too low” and said that even though many foreign central banks have a single mandate: “I think our inflation record is as good as really any major central bank, and so there’s not really been a sacrifice in that respect.”*

That’s a huge tell right there. Bernanke can’t name a single way in which his policy would change if Congress rescinded his legal mandate to attempt to maximize employment. In other words, he’s ignoring that mandate. The Federal Reserve’s attitude with respect to price inflation has been identical to what its attitude would be in a world in which it wasn’t legally required to care about inflation.

(I believe the final word in that quotation should have been ‘unemployment.’)

I’ve made similar observations over the years, but even more forcefully.  The Fed has undershot its inflation target over the past 5 years, and is expected to continue undershooting over the next few years.  In other words, if the Fed had followed the advice of those hawks who want them to focus on their inflation mandate like a laser, policy would be more expansionary.  The hawks should actually be complaining that policy is too tight.  If you applied a model of “revealed preference,” it would seem that the Fed enjoys making the unemployed suffer.  Obviously that’s not true, which indicates that the Fed is deeply confused about the policy it has actually implemented.

Kudos to Klobuchar.  Too bad her colleagues don’t know how to ask a follow-up question.

I’m currently trying to dig out from under a mountain of work–so blogging will continue to be sporadic.



32 Responses to “It’s even worse than Yglesias believes”

  1. Gravatar of Morgan Warstler Morgan Warstler
    23. May 2013 at 06:31

    I tweeted right then, Klobuchar looks to be easy NGDP convert…. she sounds scared unemployment stops being counted.

    And it shouldn’t be counted.

    MM believes if we keep to 4.5%, any incidence of unemployment is govt tax regulation fault.

    And GI CYB obviously solves it all anyway…

    Ben said out loud cut the damn taxes man, get long term deficit spending solved for…

    These aren’t tea leaves, he’s saying this shit OUT LOUD.

  2. Gravatar of Geoff Geoff
    23. May 2013 at 06:46

    Nothing wrong with unemployment arising in projects that were only started because of monetary inflation, and not because they were actually serving consumer time preferences.

    If employment is the goal, then why not advocate for the Fed to hire all those who become unemployed, to do projects based on the Fed’s desires, rather than private investor’s mistaken judgments of consumer desires?

  3. Gravatar of marcus nunes marcus nunes
    23. May 2013 at 06:52


  4. Gravatar of AldreyM AldreyM
    23. May 2013 at 07:45

  5. Gravatar of marcus nunes marcus nunes
    23. May 2013 at 07:58

    @AldreyM: I couldn´t reisist usimg the image in my post!

  6. Gravatar of Edward Lambert Edward Lambert
    23. May 2013 at 08:46

    The economy has 2 sectors… capital and labor. At this moment, capital (corporate profits, banks) has lots of liquidity. Labor has much less in comparison. So where is monetary policy tight? As regards labor.

    Yet, monetary policy is incapable of giving liquidity directly to labor. This has to be done through the intermediaries of banks and business. So the fact that the intermediaries are not creating well-paying jobs is not the fault nor responsibility of the Fed. Thus the mandate of full-employment is a delusion.

  7. Gravatar of Doug M Doug M
    23. May 2013 at 08:51

    I am not convinced that the Fed can effectively target inflation, or employment, or GDP. Well, they can target them… I am not convinced that they can particularly accurately hit their targets.

    They are not very good at forecasting GDP, or inflation, or growth. How can they be expected to hit a target that they don’t even see?

  8. Gravatar of Scott N Scott N
    23. May 2013 at 08:58

    Scott, one thing I have noticed since the last Fed meeting is that the Fed seems to be treating the size of asset purchases in a way that is similar to adjusting the interest rate. The last FOMC statement contained this line: “The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.”

    John Williams explained this a bit more in an interview today. “Williams said a tapering of the pace of asset purchases would not be a sign that the Fed is on ‘autopilot’ to end stimulus. ‘We can adjust it down some, watch how things progress from there, and then adjust it again one way or the other,’ Williams said.”

    I think it is a good thing for the Fed to adjust the size of its asset purchases the same way it would adjust interest rates if they weren’t stuck at the lower bound. Why? Because markets won’t view the first reduction in asset purchases as the beginning of the slide toward no more QE. Instead, markets will view it as a one off decision that could easily be reversed if economic data turns south (like an interest rate decision).

  9. Gravatar of Scott N Scott N
    23. May 2013 at 10:46

    Tim Duy disagrees with me:

    While the Fed will continue to say that they could adjust policy up or down, I don’t believe that they really believe this. I think they expect the first reduction in the pace of easing to be the first stage to ending quantitative easing; as such, it is not their intention to start the process until they firmly believe they will not have to backtrack.

    I hope Tim is wrong because it would help a lot if markets thought the Fed was nimble and willing to adjust the size of asset purchases as more economic data comes in rather than dead set on ending QE as soon as the Fed starts lowering asset purchases.

  10. Gravatar of Morgan Warstler Morgan Warstler
    23. May 2013 at 10:53

    Geoff just to be clear, you do support my GI CYB plan right?

    I mean not in your perfect world, but in a:

    It’s better than what we do now.

    It’s better than NGDP.

    Just making sure…

  11. Gravatar of marcus nunes marcus nunes
    23. May 2013 at 11:56

    Bernanke´s testimony caused a lot of ‘damage’ worldwide!I tend to agree with Tim Duy, that the Fed will not be adjusting policy up or down, but will stay on the present track until they feel ‘safe’ to start unwinding.
    Inflation expectations have converged to 2% and now the stock market is being proppeled, not by inflation expectations, but by the greater permanence of QE3 with thresholds attached.

  12. Gravatar of Geoff Geoff
    23. May 2013 at 12:35


    If employment is the goal, then yes, your solution is far superior to NGDP.

    But the Fed hiring all unemployed people is even better, because there doesn’t even need to be any auction, or private market tentativeness in hiring people.

    The Fed hiring people is even better because they can print whatever amount of money they want. Private market employers can’t.

    NGDP is a silly means to ensure full employment, considering how expenditures for products does not constitute expenditures for labor.

    In principle, NGDP could rise at the expense of the demand for labor, as a greater percentage of the newly printed money goes to the consumption of capitalists. The consumption spending earns the consumer goods capitalists revenues, and then those receivers then spend those additional revenues on their own consumption, and so on, without any additional money going to workers.

    NGDPLT to prevent undue unemployment is a rather cowardly way of denying the logical conclusion that “inflation to raise employment” theory leads.

  13. Gravatar of J J
    23. May 2013 at 12:41


    What’s that logical conclusion?

  14. Gravatar of Edward Edward
    23. May 2013 at 12:50


    There isn’t one. What you have to understand about hardcore austrians like Major Freedom/Geoff is that they like to see people suffer, or they’re delusional. I don’t know which is worse.

  15. Gravatar of Edward Edward
    23. May 2013 at 12:55

    And the ridiculous scenario Geoff mentioned is highly unlikely. NGDP and employment, while not the same, are tightly correlated. more of one leads to another in a virtuous circle. (Within certain limits of course. Too much NGDP leads to inflation, and is a tax on capital)

    Personally, I think NGDI, national gross domestic INCOME, is more accurate. I believe there is a discrepancy though. NGDP tends go over NGDI, which probably reflects errors. Since income equals expenditure and NGDI is more accurate NGDI should be used, always to figure out NGDP

  16. Gravatar of TallDave TallDave
    23. May 2013 at 13:07

    Yep, when the Fed misses low they have a tendency to think “we did our jobs too well!”

    Still fighting the last war over there.

  17. Gravatar of Doug M Doug M
    23. May 2013 at 13:13


    NGDP and employment are not so well correlated. Look at the 70’s. Or look at countries that had hyper-inflation. Unemployment is a function of real GDP.

    The professor has blasted several people on this site (including me) for suggesting that he intends to repeal the busness cycle. A recession is a decline in real GDP, and real GDP can fall while NGDP stays constant.

    Do autrians like suffering? Perhaps…. Austrians believe that that recessions are an effect of “malinvesment.” And only when the malinvestment has been corrected can the economy recover. Any attempst at stumulus delay this necessary correction. So, they wouldn’t prase it as “liking suffering.” They would say that the Keynesians are proloning the agony.

  18. Gravatar of Full Employment Hawk Full Employment Hawk
    23. May 2013 at 13:31

    “it would seem that the Fed enjoys making the unemployed suffer. Obviously that’s not true” MOST of the members of the FOMC may not enjoy making the unemployed suffer, but a majority are totally indifferent to the suffering of the unemployed.

    The Fed conducts monetary policy for the benefit of the rentier class and not for the welfare of the commoners.

    Having a high unemployment rate actually benefits the moneyed elite in ways in addition to avoiding increases in the inflation rate. A high unemployment rate reduces the bargaining power of workers and therefore puts downward pressure on real wages. It makes it easier for employers to take unfair advantage of their workers and also weakens labor unions and makes it easier to prevent workers from forming unions.

    If the unemployment rate drops to 6% we are likely to see major attempts by workers who are not currently paid a living wage to organize and strike, but the high current unemployment rate effectively suppresses this.

    The fact that the Fed continues to do this in spite of the fact that Obama has now been able to fill most of the BOG positions is a major failure on the part of the Obama adminstration to foster the interests of its voter base.

  19. Gravatar of Edward Edward
    23. May 2013 at 14:02


    I already mentioned that. NGDP was definitely too high during the 70’s and during hyperinflation. Level targeting works both ways you know.

    I am well and familiar with what Austrians would say about “inflationists” like Friedmanites and Keynesians, who would simply prolong the agony. It sounds like something a VSP would say, it sounds virtuous and noble, while casting Keynesians and Monetarists and monetary drunkards.

    And it would be wrong.

    There are so many things wrong with Misean Rothbardian Austrian theory. Lets start with the simplest, the universal nature of the recession as opposed to a concentrated one in the capital goods industries, which you would expect from the “capital misallocation story.” The fact that there is no stable natural rate of interest. That it would be unstable even in an ancap society, so market interest rates are always deviating from time preferences, which renders the concept useless. (By the way, which time preferences should you use, unmolested as they would be in an ideal ancap society without FRB? Your own? Your nation, the world’s? Crickets) The fact that when the bust happened, prices fall, as opposed to rise, which you would expect to see if their were a shortage of “bricks” in that overused bricklayer analogy.

    The tiresome fact is that Austrian are always predicting disaster, and crow about it when they are proven right as with Peter Schiff (Even a stopped clock is right twice per day) This brings me to another thing I detest. The lack of predictive power. In science, prediction goes hand in hand with explanation. The fact that Austrian theory has very limited predicative power renders it useless.

    The fact that Austrians believe inflation is theft, which is ludicrous nonsense. Theft is when someone steals your actual goods, not when their relationship to other goods is altered. It would be like saying that iphone 4 users are “harmed” when more of them are made, or worse, when the iphone 5 comes out. (Austrians usually get out of this by saying that you don’t pay taxes in iPhones) This is true, but consider the mandatory nature of legal tender laws, they only deal with debt. You are not obligated to accept greenbacks if someone is paying you in a cash transaction. The coercion here is minimal)

    The fact that Austrian hardcore and “austerian” opposition to even monetarist measures to fight recessions means in effect that they are allying with those who want MORE INTERVENTION. As scott says, countries that follow hard money regimes tend to go socialistic

    The fact that Austrians have no appreciation for the horrendous nightmares that can arise from a recession, namely charismatic tyrants. Tight money did indeed help Hitler rise to power. (It was not the only factor, but it was an important one) And tight money today is helping radical parties in Europe flourish. Only a kantian absolutist lunatic would deny it.

    Now, all of this isn’t to say that there are no responses to this among Austrians. there are. But they are long, endless, streams of verbal diarrhea (much like my rant, but I needed to get that off my chest for a looong time! 🙂 ) and absolute unconvincing gibberish.

  20. Gravatar of Edward Edward
    23. May 2013 at 14:21

    A Kantian absolutist lunatic is someone is fanatically attached to his own deontology, with no regard for the RESULTS of his principles in the real world. These are the soulless bureaucratic drones who say, “it doesn’t matter, those are the rules, the law is the law.” Of course this comes without regard for exception, compassion, or even justice. (As Captain Picard once said in Star Trek TNG, “there can be no justice so long as laws are absolute!”. {And we all know he’s right because he’s british and he sounds good…. 🙂 . That was a joke, by the way})

    The defects of extreme deontology on the one hand, and extreme consequentialist pragmatism on the other, is why I am a rule consequentialist. Its right to follow rules, but they have to reliably produce the best results in the real world

  21. Gravatar of Edward Edward
    23. May 2013 at 14:25

    Just to pre-empt some Austrians here, I read Robert Murphy’s “sushi” story. Clever, but doesn’t cut it

  22. Gravatar of ssumner ssumner
    23. May 2013 at 17:19

    Doug, They can certainly target the forecast.

    Steve N, Good point. I’d say say that the Fed doesn’t like to go back and forth, but the past several years certainly shows that they will do so if conditions warrant a change in policy.

    Marcus, Bernanke needs to choose his words more carefully.

    Edward. I’m also a rules consequentialist.

  23. Gravatar of Lorenzo from Oz Lorenzo from Oz
    23. May 2013 at 23:07

    Edward Lambert: Income expectations matter for employment and central banks can most certainly affect income expectations. So, yes, the fault of the Fed.

  24. Gravatar of Michael Michael
    24. May 2013 at 03:07

    This has happened so many times that I wonder if Bernanke does it on purpose. Maybe the events of today help him gain consensus to avoid premature tightening?

  25. Gravatar of Morgan Warstler Morgan Warstler
    24. May 2013 at 04:30


    Geoff, my plan doesn’t require ANY new spending. Zero. Zilch. Nada.

    So rather than a half hearted joking MMT sounding fed should hire directly….

    I want the hard core Austrian, LIKE I AM, to grant that our best realistic strategy is:

    First we do GI CYB, then IF and ONLY IF there it doesn’t solve unemployment, NGDPLT will essentially fill the smallish gaps.

    I’m not saying NGDPLT solves unemployment, I’m saying NGDPLT essentially trades away the highs… meaning under 4.5% NGDPLT it is IMPOSSIBLE we’d have had the easy money home flipping boom.

    Where Scott has convinced me is that Financial Crisis is WHEN the state grows, and smart Austrians are willing to cover their rear side, NGDPLT will bring an end to financial crisis of this magnitude.


    We don’t operate in a vacuum, Austrians have to fight like pirates, hackers, entrepreneurs, and ACCEPT we are the C Player, in a tri-polar game.

    We have limited opportunity for offense, we have to play a ton of defense.

    It’s fine to argue the subtle philosophical nuances between our favorite purists amongst ourselves, but the NEXT LEVEL of thinking is actual policy proposals that block and tackle the running game, and stop just screaming we should run the Hail Mary every damn play.

    So PUH-LEASE, could you just ever so often point out that we can have the same level of Fiscal spending as we do today, GIVE EVERYONE who asks to work $240 a week, require them to choose an offered job (sold at $40), and increase consumption in the ghetto by 30%+ and NOT NEED TO PRINT MONEY or raise taxes.

    Tea party + Congressional Black Caucus FTW!

  26. Gravatar of Doug M Doug M
    24. May 2013 at 09:30

    Funny, I have never heard the overused bricklayer analogy.

  27. Gravatar of Don Geddis Don Geddis
    24. May 2013 at 15:59

    @Doug M: The “overused bricklayer analogy” is a (naive and silly) story often brought up by Geoff (and other Austrians), to “explain” recessions. It goes like this: a builder begins constructing a house, that requires 50,000 bricks to complete. He believes he has 50,000 bricks in the shed. But there are actually only 40,000 bricks in the shed. This is “malinvestment”. A year later, he suddenly realizes that he doesn’t have enough bricks, and the house must be abandoned, half-constructed. Because the economy doesn’t have enough real resources to complete all the planned investments.

    The Geoff/Austrians believe that something like this analogy holds, when the central bank holds interest rates “artificially low”, thus encouraging excess business investment that “can’t” all be completed. They can’t predict when the recession will happen (it is whenever the investors finally realize they don’t actually have enough resources), but they have great confidence that there will eventually be a “day of reckoning”.

    Whether using this analogy as a causal explanation of the Great Recession of the last few years, is a mistake or not, I leave as an exercise for the reader.

  28. Gravatar of Don Geddis Don Geddis
    24. May 2013 at 16:07

    @Doug M: The bricklayer story is a pretty silly one, and obviously breaks down very quickly if you look at data from the real economy. If you want to give yourself a bigger challenge, you can think about Bob Murphy’s sushi model of capital consumption. That one is wrong too, but at least it’s a more sophisticated and intelligent attempt to get at the same (Austrian) intuition. And Murphy at least attempts to fairly summarize the contrasting views of non-Austrians, which is rare for those folks, so he should get some credit for that.

  29. Gravatar of Doug M Doug M
    24. May 2013 at 17:19

    So, what happens in the bricklayer story? The contractor has to lay off the electrician and the plumber while the bricklayer looks for a supplier of bricks. Production is delayed for two weeks. The plumber takes on a new job, but the electrician is not able to find work. The brick layer finishes his piece. But when it is time to do the plumbing, the plumber is no longer available. The contractor finds a new plumber, but that delays the time for the dry wall and painters to come in. What was supposed to be a 6 week $100,000 project becomes a $12 week 150,000 project.

  30. Gravatar of Doug M Doug M
    24. May 2013 at 17:21

    When Enron blew up, I read an article about some poor Enron employee who had $1 million dollars in Enron stock, but now that stock was worthless. How is she going to retire? And I thought, did she really have $1 million worth of stock? Or, did she have what she thought was $1million worth of stock? She had a claim on a share of the economic value that Enron was producing. And, it turned out that that what Enron was producing, actually had no economic value. She had a retirement plan that was $1 million of smoke, and no actual economic value.

    And then WorldCom blew up, and I started thinking about the millions of miles of fiber-optic cable that had been laid, because people had correctly assumed that people would want high speed internet and demand for bandwidth would only increase. But as it turned out, it was possible to fit a whole lot more bandwidth on a fiber than had been previously estimated. This should increase the value of the fiber, each cable is capable of doing much more than we had thought it could. But, instead we had a glut of cable. The effort of laying much of that cable was a wasted effort. Dollars that had already been counted as GDP, it turns out was production that was as mythical as the valuation of that Enron stock.

  31. Gravatar of Don Geddis Don Geddis
    24. May 2013 at 18:04

    Doug M: No, that’s not how the bricklayer story is intended to end. The usual claim is that there are no more bricks to be found, anywhere. Society, as a whole, embarked on too many projects simultaneously, because they were misled about how many resources they actually had available. In the story, it is not possible to find more bricks, and it is not possible to finish the house. So the bricklayer and plumber and electrician are all unemployed. And, in fact, need a long delay while they retrain for some other industry, since there were too many people working in the house-building industry, given the real (as opposed to central bank-caused illusion) number of bricks that society has.

    (Keep in mind that I’m not actually trying to convince you that this story makes any sense. I’m just trying to present the view as it is usually presented by the internet Austrians.)

  32. Gravatar of Doug M Doug M
    24. May 2013 at 19:45

    If you have ever done a remodel you will know that version of the story is entirely accurate.

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