Politics & Policy

Not Bad, Bernanke

Thus far, the Fed candidate's performance has been encouraging.

Early on in his confirmation hearings before the Senate Banking Committee, Federal Reserve nominee Ben Bernanke made plain his wish to avoid “making recommendations on specific tax and spending proposals” in his future role as chairman. Despite his laudable desire to stay away from legislative questions, he offered up encouraging opinions on a number of economic questions. However, regarding his thoughts on inflation, while he repeatedly stated his desire to achieve price stability and low inflation, it’s still not very clear how he’ll define either.

On the question of the current account deficit, more than one senator tried to coax out of Bernanke a sky-is-falling interpretation. Instead, it’s very apparent that he views the trade deficit in a more positive light. He noted that foreign holders of U.S. assets “are not doing us a favor,” rather “they’re choosing a set of assets which they consider to be highly liquid, highly safe, from a country with a safe, strong legal system.”

When asked about the savings rate, it was evident that Bernanke does not buy the conventional wisdom that says Americans don’t save. In response to a question from Sen. Tom Carper (D., Del.), he said, “part of the reason for the low savings rate in the last few years is that our wealth has risen for a variety of reasons.” Indeed, so long as Americans achieve high investment returns, the government measure of how much we save will be distorted and will make the savings rate low.

In response to Sen. Jack Reed’s (D., R.I.) questions about the revenue affects of tax cuts, though he regularly reminded committee members that he would like to steer clear of tax questions, it was apparent that Bernanke doesn’t hold the static view that says tax cuts represent “costs” to the Treasury. Bernanke noted that “tax cuts, if they’re well-designed, do increase growth and therefore do partially offset the revenue loss.”

Bernanke’s views on China’s management of the yuan were less encouraging. He said “it’s very much in China’s own interest to allow their currency to float freely and be determined by the market.” The problem is that the advocates of benign neglect rarely articulate what’s so great about a lack of policy in terms of money. And that’s what floating rates represent.

In Bernanke’s defense, it probably didn’t make sense to point this out given all the controversy it would have caused before a panel that included liberal Sen. Charles Schumer. No doubt Bernanke knows that markets don’t so much set currency values as they respond to the monopoly management of currencies by central banks. If Bernanke is the inflation fighter he says he is, presumably he would like China’s growing economy to benefit from his expertise in this area and, as such, maintain a dollar-yuan peg.

Bernanke, as mentioned, repeatedly expressed his desire to achieve price stability. The question then is how he will define it. Price stability in terms of goods and services and/or the CPI is logically a false notion.

Producers constantly seek to do more with less, and in doing so, continuously lower the labor inputs needed to create the products we buy. This lends itself to the gradual lowering of product prices and services, and has very little to do with price stability. That U.S. measures of “poverty” today generally include ownership of televisions and automobiles, and a standard of living that greatly exceeds how even the upper middle classes lived 100 years ago, argues for extreme price instability in a downward direction.

Moving to specific discussions of inflation, while Bernanke at one point retreated into output-gap orthodoxy that says inflation results when “aggregate demand, aggregate spending is greater than even the growth that underlying conditions can permit,” he also specifically referred to gold as one indicator that he’ll use in gauging inflation pressures. Anecdotally, Bernanke has reached out to various economists who believe monetary policy would be more effective if the dollar were defined in terms of gold or a basket of commodities.

While the above is clearly a positive, Bernanke added that his inflation strategy will be “very eclectic,” and he’ll “look at a wide range of indicators.” Alan Greenspan has done the same thing, and as Steve Forbes noted recently, “Greenspan’s gut has not been infallible.” The value of a more transparent and simple gold-based approach to money is that there is very little mystery involved. The price of gold is largely unstable for the currencies in which it’s priced, as opposed to changes in its real value. The stock/flow aspects of gold make it uniquely suited to telling the truth about how the dollar is being managed.

Regardless, there was very little inflation discussion during the hearings, other than Bernanke making it clear that he’ll seek to achieve a low level of inflation. What remains mostly unclear is what indicators will most influence his decision-making. Here’s hoping his reference to gold and commodities will prove telling, and that his stated desire for transparency will gradually move these inflation indicators high on his radar screen.

John Tamny is a writer in Washington, D.C. He can be contacted at jtamny@yahoo.com.


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