Fed Chairman Bernanke Chosen as Time Magazine's Person of the Year

In a December 16, 2009 article, Michael Grunwald details the reasoning behind Time Magazine’s choice of Federal Reserve Chairman Ben Bernanke for Person of the Year. The article delves into Bernanke’s background such as his working class roots and the consensus that he is “a leading scholar of the Great Depression.” It also details the unique nature of the crises of 2007-2008 to which the Fed responded in creative and beneficial ways.

Chairman Bernanke is currently awaiting a Senate vote to be confirmed for another term as Fed chairman. The vote is being held up by a Senator from the far left and another from the far right. The Time article is largely critical of those who oppose Bernanke, portraying them as nitpicky demanders of perfection who fail to realize that the Federal Reserve’s actions over the past two years most likely “prevented an economic catastrophe.” It is apparent that the Fed, like most people caught up in benefiting from the bubbles of those years, took too long to recognize the danger signs. Yet, the desire to criticize and rein in the Fed’s power now that the crises are largely history is short-sighted and will be harmful to long-run inflation rates. Most economics textbooks cover the extensive research that shows that greater central bank independence goes along with more stable and lower inflation rates.

As Bernanke is quoted in the article, "We came very, very close to a depression ..." That is because in the fall of 2008, the collapse of the financial sector and asset prices looked remarkably similar to the events that marked the start of the Great Depression. However, thanks largely to the bold actions of Bernanke’s Fed, the US experienced a severe recession rather than a depression. That distinction is significant and reason enough for the awarding of Time Magazine’s honor. Grunwald’s article gives evidence that Bernanke’s knowledge and research into the Depression made him the perfect man to hold one of the most powerful positions for influencing the world economy. As written by Grunwald, “He didn't just reshape U.S. monetary policy; he led an effort to save the world economy.”

Admittedly, the severe recession has caused significant hardship to billions of people. However, based on economists’ consensus definition of recession, the US economy has been in recovery and thus out of recession for several months now. Indeed, the figure to the right shows a picture of an economy that will most likely experience positive net job creation in coming months. Such positive net job creation has not occurred since the recession began in December 2007. This scenario looks much rosier than could have been hoped for back in the fall of 2008. This is an important reason why Bernanke is expected to be confirmed for another term:



Finally, Bernanke’s critics need to understand that macroeconomics is not a true science. Despite the mathematical rigor required to publish articles in the field, macroeconomists cannot perform true experiments with a nation’s economy. Therefore, there is no comparison “control group” of a US economy run by someone who chose not to bailout AIG or who refused to dramatically expand the Federal Reserve’s balance sheet with risky assets. We will never know with any respectable precision what might have happened if it had not been for Bernanke’s bold leadership.

Perhaps someday a scientific genius will invent a time machine so that Bernanke’s critics can go back to the early 1930s to experience a collapsed economy. Most economists agree that the experience of those years is the best counterexample to show what we would have experienced without bold action by the Fed and our elected officials. Let the critics be reminded that the demand for perfection is all too often the enemy of good governance.

Discussion Questions

1. What is your reaction to Time Magazine’s choice of Federal Reserve Chairman Ben Bernanke for Person of the Year? Why?

2. Suppose that you were able to cast a vote in the Senate on Bernanke’s reappointment. How would you vote? Why?

3. Imagine you were currently chairperson of the Fed. What, if anything, would you be doing differently?

4. Do you approve or disapprove of the movement to rein in the power of the Federal Reserve? Explain.

Recession-proof

Doomsayers are coming out of the woodwork en masse as 2008 ended during a dismal economic downturn. With consumer confidence at an all-time low, the financial industry shell-shocked as grand, monolithic companies crumbled all around, and nearly 2 million jobs lost in the past year, the end looks nigh indeed.

But before you don your sandwich boards and raise high your signs, things may not be as bad everywhere as they seem.

The economy rises and falls in what's called a business cycle. Some years are relatively prosperous with rapid economic growth and expansion while other years see the economy contract or stagnate. These fluctuations last over periods of years and their timing is largely unpredictable.

Some firms stick with the general trend of the market, their business conditions weakening when the market weakens, strengthening when the market recovers. These are procyclical firms. Others, countercyclical firms, do the reverse; their business conditions weaken when the times are good, and strengthen when times are bad. There are still other industries that don't depend on how the economy is doing at all.

So, while the bankruptcies and bailouts get the boldest headlines these days, here's a brief list of industries that are doing just fine.

• The funeral services industry depends more on long-term trends such as aging populations and baby booms rather than on the twitching of the stock ticker. And of course, it also helps that their services are always in demand.

• The entertainment industry is another good example. Revenue from concerts and movies have stayed strong during this economic downturn. Faced with gloom and doom, many find the few hours of escapism well worth the price of admission.

• Discount stores, most notably Wal-Mart, are attracting cash-strapped customers looking to get the most out of their money.

• As jobs get scarcer, going back to school makes a lot of sense for those looking to weather the fierce competition in the job market and to improve their skills and credentials. According to the Labor Department, the education industry has added 9,800 jobs in November.

Discussion Questions

1) What are other examples of procyclical industries? Countercyclical industries?

2) During the economic boom of the '90s, how did countercyclical industries do? Did more people drop out of school and enter the labor force? Did Wal-Mart suffer a decrease in sales?

3) Do you think prices, in general, drop during a recession? Why or why not?

4) How much do you think countercyclical firms contribute to an economy's eventual recovery?

The Federal Reserve’s New Target Range

On December 16, 2008, one of the most significant monetary policy decisions in US history was handed down by the Federal Reserve's Open Market Committee (FOMC). In an effort to combat accelerating deflation in the Consumer Price Index (CPI) and massive job losses, the FOMC announced a reduction of its federal funds rate target from 1% to an unprecedented range of 0% to 0.25%. While critics of the move might point to relatively stable core inflation rates (which exclude food and energy), the FOMC was clearly more concerned about the state of the job market and the accelerating deflation reflected in the headline CPI. In fact, for two consecutive months, the US experienced record CPI deflation with rates of -1% in October and -1.7% in November of 2008. Along with OPEC's attempts to curtail oil production, this move by the FOMC is likely to help stabilize the price level.

The Fed announcement is historic for the low level of rates in its targeting and for the unique setting of a target range. This gives the Fed modest room for flexibility above the nominal floor of a zero federal funds rate. Whether it will be enough to spur the feeble economy is doubtful. Fortunately, the FOMC also announced that the federal funds rate is likely to remain within the target range for an extended period. The central bank is also prepared to purchase agency debt and mortgage-backed securities. Furthermore, through the Fed's expanded toolkit, it will begin direct loans to households and small businesses starting in 2009.

Fed chairman Ben Bernanke recognizes that the US economy is ripe for implementing the tenets of his Bernanke Doctrine, outlined in his 2002 speech titled "Deflation: Making Sure 'It' Doesn't Happen Here." In that speech, well before he was appointed to chair the Fed, he stated, "the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending—namely, recession, rising unemployment, and financial stress." Bernanke now has the chance to run the Fed during the precise scenario that he described six years ago.

In fact, the FOMC's press release of December 16, 2008 announces policy that effectively implements most of the seven steps of the Bernanke Doctrine. The FOMC's bold move may stave off a severe recession, but it does not come without potential costs. The combination of aggressive monetary policy, and recent and proposed fiscal stimulus could eventually reduce confidence in the US Treasury's ability to service its debts.

For the time being, Chairman Bernanke appears to be doing what is necessary to support another of his statements from six years ago:

Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve System. I would like to say to Milton and Anna [Friedman]: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again.

Discussion Questions

1. What could be the negative ramifications of implementing such a bold expansionary monetary policy at this time? How likely do you think it is that such negative ramifications occur?

2. Do you believe that historically low interest rates will be sufficient to save businesses struggling to avoid bankruptcy, such as those in the auto industry?

3. The current state of the US economy bears remarkable similarity to that of the beginning of the Great Depression. Do you think that Chairman Bernanke and his doctrine will keep the US out of a deflationary spiral? Will the doctrine, along with fiscal policy from recently elected officials, be enough to keep America out of a depression?

4. The US national debt held by the public is currently about $6.4 trillion or 45% of the nominal GDP in 2008. Is there any reason to worry over the ability of the US Treasury to meet national debt obligations? Why or why not?

5. Now that gasoline prices have returned to low levels, some economists may believe that it is an appropriate time to raise the federal gasoline tax. Do you agree with this position? Why or why not?

The Per Capita Recession

GDP (Gross Domestic Product) is a statistic that economists use to gauge the output of a nation. Movements in GDP provide clues about the health of an economy.

Look at GDP growth over the last five years, and the United States comes out smelling like roses, relative to other high-income countries, at nearly 3% growth per year. But statistics can be deceiving.

An article from the Economist titled “Grossly Distorted Picture,” questions whether GDP is an accurate measure of a nation’s economic health. The article suggests that, though GDP growth for the United States is higher than other countries, other factors, like population, also play an important role. As the article points out, growth of GDP per person is perhaps a more meaningful measure of economic progress than simply growth of GDP.

For example, over the same four-year period (2003-2007) Japan’s GDP growth was just over 2%, far below the nearly 3% growth the United States experienced. But during that time, Japan’s population was shrinking while the population of the United States was growing at nearly 1% per year.

If you calculate GDP per person Japan’s economy actually grew faster (2.1%) than that of the United States (1.9%).

Discussion Questions

1. Which countries have the biggest discrepancies between GDP growth and GDP per person over the last five years? Does that change your perceptions of the health of these nations?

2. As the article points out, annual U.S. population growth is roughly 1%. The annualized growth of U.S. real GDP (real GDP is an inflation-adjusted measure of output) was 0.6% during the last three months of 2007. Assuming U.S. real GDP growth in the first three months of 2008 was about the same—what does this imply for U.S. GDP per person?

3. Economists typically define a recession as six months or more of declining real GDP How would the use of real GDP per person rather than real GDP change our perspective on recent U.S. economic performance? According to this method, is the U.S. economy in recession?

4. As gauges of economic output, both GDP and GDP per person have their flaws. For starters, each measure misses the value of things that are not traded in a legitimate marketplace but may nonetheless impact our economic well-being. Underground activity, whether illicit drug dealing or benign babysitting, does not register in national income accounts. Environmental damage associated with our production and consumption is also not a factor. Can you think of other statistics we should consider when measuring a nation's economic health? What are some of the benefits and drawbacks to those methods?