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Economics, Politics and Ben Bernanke’s Press Conference

Prof. Peter Morici - 4/29/2011

On Wednesday, Ben Bernanke discussed with reporters decisions taken by the
Federal Reserve Open Market Committee. For this unprecedented press
conference to be successful, Mr. Bernanke had to venture where Fed Chairmen
are most reluctant to go—into politics.

Economists have long held that transparency about goals and means makes
monetary policy more effective. However, genuine transparency requires that
Mr. Bernanke acknowledge the limits imposed on the Fed policy by the actions
of Congress, the Administration, and foreign governments.

Inflation is heating up, thanks to rising oil, food and other commodity
prices. Many in Congress and financial markets blame QE2—the Fed’s policy of
purchasing Treasury securities to moderate interest rates on mortgages,
corporate bonds and the like—but easy money is not causing inflation.

China and several other Asian governments choose to keep their currencies
substantially undervalued against the dollar and regulate domestic gasoline
and other commodity prices. Those policies boost Asian exports and growth,
slow U.S. and European growth, and push up global prices for oil and other
commodities.

Growth in developing countries is inordinately energy and other-commodity
intensive, as greater prosperity translates into more cars, apartments and
commercial buildings, roads, and richer diets—more meat and milk that
require grains to produce. All that pushes up global prices for the oil,
building materials and food those economies must import in massive
quantities to grow quickly.

Moreover, those governments must print and trade huge amounts of their
currencies for dollars with U.S. and EU importers to keep their currencies
from rising in value against the dollar in foreign exchange markets. That
gives those governments piles of greenbacks to subsidize oil imports, keep
domestic prices for gas and diesel from rising too quickly, and shift the
burden of tighter global oil supplies onto the United States, Europe, and
poorer developing countries.

In the United States, the immediate result is soaring gas and food prices,
even as unemployment remains uncomfortably high and wages hardly keep pace
with inflation.

The Fed can do little about the actions of foreign governments to control
that inflation, but the United States is not helpless. Economists on the
right, the left and in the center have articulated policies the Treasury
could pursue, in addition to G20 diplomacy, to neutralize Beijing’s and
other government’s currency manipulation. President Obama has acknowledged
the potential effectiveness of those options but nixed their use.

Ben Bernanke has articulated the connection between Beijing’s exchange rate
policy and slower U.S. growth, and he well understands the direct connection
between China’s currency policies and protectionism, on the one hand, and
U.S. oil and food inflation, on the other.

Mr. Bernanke would do his cause, and the nation’s understanding of the
choices he faces, a lot of good if he would articulate the connection
between China’s currency manipulation and rising gas and food prices, the
limits of Fed power to manage inflation, and the options available to the
Treasury to accomplish solutions. However, Mr. Bernanke won’t embarrass a
Treasury Secretary and President too timid to act, and will continue to
carry the pail for the Administration’s inaction.

Year-over-year, energy prices are up 16 percent—gasoline, 28 percent—and
food prices have increased 3 percent, while inflation on other items is
barely more than one percent. Considering the latter include health care and
college tuition, where government policies drive prices ever higher,
inflation in the free-market private sector is no more than one percent a
year.

Easy monetary policy causes inflation when the economy is near full
employment—then too much money chases too few goods. But with 8.8 percent
unemployment, wages are hardly moving, and productivity growth has permitted
firms to absorb much of the cost of higher energy and other commodity
prices.

Simply, low interest rates and QE2 are not driving inflation. If members of
Congress, like Representative Ron Paul, want inflation fixed, they should
address currency and trade problems with China. However, they are reluctant
to seize exchange rate policy from the Treasury and President. Instead, they
score points and troll for votes by trashing the Fed, and will continue to
do so, until Mr. Bernanke pushes back.

This is the core of Mr. Bernanke’s challenge on Wednesday. The Fed is
supposed to be non-political; but if he is to explain monetary policy to the
public—its purposes and limits—and create the transparency economists
believe improves Fed effectiveness, he must be political.

On the blackboards of graduate seminars, economics is physics—energy,
actions and reactions— but in Washington it’s nothing more or less than raw
politics.