Ben Bernanke Makes History, Not News

Ben Bernanke made history Wednesday by delivering the first-ever on-the-record press conference by an incumbent Federal Reserve Chairman. Unfortunately, he didn't make any news.

Nobody really expected the Chairman to announce a dramatic new initiative to spark economic growth and restore health to the labor market, but hope springs eternal. All we got in terms of policy was a bland statement earlier in the day noting that the Fed would be phasing out its "quantitative easing initiative" -- the Treasury bond-buying program intended to pump money into the economy -- and that the central bank would keep interest rates at zero.

We also got an updated set of economic projections from the Fed, and the outlook is bleak.

The Fed says that real GDP growth over the next few years should be in the 2.8 to 3.2 percent range. That's a decent number for an economy that's healthy enough to provide jobs to those who need them, a condition known in economics as "full employment." But, of course, that's not currently the case -- and it won't be anytime soon. As late as 2014, the Fed projects unemployment will still be as high as 7 percent -- a full one- to two- percentage points above a broadly accepted ideal rate of 5 percent. That means that, three years past the pre-recession peak, we're looking at another three of elevated unemployment and slow growth output even though we're already. In a decent world, this is the sort of projection that ought to set policymakers' hair on fire. Why isn't the Fed doing more?

The financial press assembled at Bernanke's press conference hardly seemed to think the question was worth asking. Instead, most reporters asked questions about gasoline prices or the debt ceiling. Only The New York Times' Binyamin Applebaum asked about the Fed's timid approach to the economic recession.

In response, Bernanke basically said that fixing the labor market would be too risky. After all, "if inflation expectations were to become unmoored, the cost of that in terms of employment loss in the future would be quite significant" because the Fed would need to respond with tighter money. In essence, policymakers are saying that they're okay with high unemployment today because if they take drastic steps to eliminate it, they might get inflation. If that happens, then they'd need to provoke a new round of unemployment to cure the inflation.

That's not a totally crazy concern, but it reflects a curious assessment of risks: Technically, America's central bank has a "dual mandate" and is supposed to both avoid inflation and elevated unemployment. In practice, it takes a very lopsided approach. Bernanke is clearly willing to act to stave off total economic collapse, but he's deeply unwilling to improve the overall economy in any way that might even slightly risk sparking inflation. Imagine a tightrope walker with a net on his left side and a fiery pit to his right. He's going to try to stay on the rope. But he's going to make damn certain that if he falls, he falls to his left.

That's essentially Bernanke's take on the American economy. But there's a problem. He and other members of the policymaking elite may have a net to their left, but unemployed people and vulnerable communities don't.

From a technical point of view, the risk of short-term inflation is one that could be addressed. Michael Woodford, the author of the leading monetary economics textbook, explained months ago that the way out is for the Fed to act boldly now to ease unemployment, but also clarify that it will allow a "one-time-only inflation increase" with the understanding that it will it will implement a plan to curb it "once the target level of prices has been reached."

That sounds like a good idea, but of course it hasn't been tried before.

It's hard to avoid the conclusion that demographic biases are driving policy at this point. Unemployment is lower for college-educated people than for those with only a high school diploma. It's lower for white people than for blacks and Hispanics. And it's lower for middle-aged people than for the young. Not coincidentally, both the Federal Reserve Board and the United States Congress are full of middle-aged white people with college degrees who mostly socialize with other middle-aged white people with college degrees. The editors of major business and political publications look pretty similar. The result is a bubble in which condemning the country to years of higher-than-necessary unemployment as a precautionary measure seems to make sense. And with fiscal policy off the table in congress, it looks like those of us outside the bubble are just going to have to live with it.

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