Wednesday, September 28, 2011

Bernanke Hearts Neoliberalism

Mike Konczal - who I think is as clear and as good as it gets on the economy - has recently argued that the Left should be pressuring the Fed to take whatever actions are necessary to produce inflation. For some reason - (probably because Krugman personally likes Bernanke) - I always thought Bernanke would be more aggressive if he could, but that he's dealing with political pressure - within the Fed, from the GOP and, of course, the mafioso-style threats from Rick Perry.

However, Ben Bernanke delivered a paper today in Cleveland, which gives some insight into what he might be willing to do with respect to the economy and into his thinking generally. And it's really not good. First of all, it looks like he's an inflationista (and that's really not good). Here's what Mark Thoma makes of his position on inflation:
So Bernanke sees low and stable inflation as one of the keys to long-run economic growth, it avoids “costly swings in economic activity,” and from the Fed’s actions recently it appears that the Fed is reluctant to risk an outbreak of inflation. I don’t think this should be a worry, the Fed could be more aggressive now to try to help the unemployed, i.e. let inflation rise above target, without risking its long-run commitment to price stability. But apparently the Fed does not trust itself to bring down the inflation rate in the long-run if it allows it to rise in the short-run. I guess I have more faith in Bernanke and others at the Fed than they have in themselves.
This means there's very little chance of the Fed doing anything really helpful - so, one of our three means of recovery is severely hampered (the other two being fiscal stimulus and debt restructuring).

And that's not all - in fact, here comes the terrifying part - the template for Bernanke's talk was on the Washington Consensus, and he pretty much embraces the project in its entirety:
Fostering Growth in Developing Economies: The Washington Consensus 
*          *          * 
A classic attempt to generalize about the policies that best promote economic growth and development, and a useful starting point for discussion, is the so-called Washington Consensus . . .  
   *          *          * 
By comparing current views with those described by Williamson in 1990, and accepted by many, we may learn something about which ideas have held up and which have been modified or refuted by recent events. I will take in turn the three groups of policies that make up the Washington Consensus. 
The first group of recommendations, as I noted, comprised policies aimed at increasing macroeconomic stability. In this case there is little controversy. Abundant evidence has linked fiscal discipline, low inflation, and a stable macroeconomic policy environment to stronger, longer-term growth in both emerging and advanced economies. In particular, many emerging market economies in the 1990s emulated the success of the advanced economies in the 1980s in controlling inflation. . . . Disciplined macroeconomic policies have also supported growth in emerging markets by fostering domestic savings, stimulating capital investment (including foreign direct investment), and reducing the risk of financial instability. 
The second group of recommendations listed by Williamson emphasized the need for greater reliance on markets: the freeing up of the economy through privatization, deregulation, and liberalization. The basic idea here has held up pretty well . . . most observers today would agree that carefully managed liberalization--the substitution of markets for bureaucratic control of the economy--is necessary for sustained growth. . . .  
The third part of the Washington Consensus focused on strengthening property rights and the rule of law--for example, through effective enforcement of contracts. The evidence suggests that these factors too can be important for development. . . .  
Amending the Washington Consensus 
Overall, some key elements of the Washington Consensus appear well supported both by basic economic logic and by their successful application by a number of countries. However, the experience of the past two decades also suggests some lessons that augment or modify what we thought we knew about economic development in 1990. I will highlight three specific lessons. 
First, the implementation of the Washington Consensus recommendations is important and not so straightforward in practice. In particular, as I alluded to earlier, the sequencing of reforms matters. . . . 
Similarly, dismantling controls on the domestic financial industry has proven counterproductive . . . . 
A second important lesson of the past two decades involves the pivotal role of technologyin economic development. . . . 
A third important lesson that has come into sharper focus, and which was not fully appreciated by the Washington Consensus, involves the capacity to draw on economies of scale to accelerate the pace of technical progress and economic growth. . . .  

So, there it is - full steam ahead with neoliberalism. Sure, there was a slight blip with "dismantling the controls on the domestic financial industry" (it crashed the fucking world economy). And we need to watch the sequencing - our bad Russia! - but other that: Success! Full success

This is so out of touch with reality. These people should be saying: "What the hell happened? How did we get it so wrong?" It's really hard to imagine a profession failing more spectacularly. Compare, for example, Bernanke's ringing endorsement of Washington Consensus policies developed in the 1990s with Paul Krugman questioning whether the profession has learned anything at all since the 1970s:
I’ve never liked the notion of talking about economic “science” — it’s much too raw and imperfect a discipline to be paired casually with things like chemistry or biology . . . . 
Still, when I was younger I firmly believed that economics was a field that progressed over time, that every generation knew more than the generation before.
The question now is whether that’s still true. In 1971 it was clear that economists knew a lot that they hadn’t known in 1931. Is that clear when we compare 2011 with 1971? I think you can actually make the case that in important ways the profession knew more in 1971 than it does now. 
I’ve written a lot about the Dark Age of macroeconomics, of the way economists are recapitulating 80-year-old fallacies . . .  
What I’d add to that is that at this point it seems to me that many economists aren’t even trying to get at the truth. When I look at a lot of what prominent economists have been writing in response to the ongoing economic crisis, I see no sign of intellectual discomfort, no sense that a disaster their models made no allowance for is troubling them; I see only blithe invention of stories to rationalize the disaster in a way that supports their side of the partisan divide. And no, it’s not symmetric: liberal economists by and large do seem to be genuinely wrestling with what has happened, but conservative economists don’t. 
And all this makes me wonder what kind of an enterprise I’ve devoted my life to.

That's the proper attitude of someone who belongs to a profession that has just wrought untold pain and devastation and cannot - for the life of them - do anything to fix this disaster they've created. Instead, Bernanke has concluded that the Washington Consensus was mostly right (just need a tweak here and there) and he's committed to following the path of keeping inflation low - and he'll follow it over a cliff, if necessary.

It's really, really not good. 

Cross-posted at Daily Kos.


  1. "[D]ismantling controls on the domestic financial industry has proven counterproductive". No kidding? Maybe there was a reason that the financial industry began being regulated during the Great Depression.

  2. I know - can you believe that statement?

  3. Thanks for this; I had seen a blurb about Bernanke's statements on inflation and thought they looked more than troubling, but didn't have time to click through and read about it in more depth. Nice to know my initial reaction was probably the right one to have.