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Home Publications Blogs Beat the Press Two Takes on the Fed: NYT and the WAPO

Two Takes on the Fed: NYT and the WAPO

Wednesday, 27 April 2011 04:52

It is striking to see the difference in the NYT and the WAPO in their discussion of the Fed's track record in the last two years. NYT columnist David Leonhardt raises the obvious point: the unemployment rate is far above anyone's estimate of full employment with no signs of core inflation in sight. The question is why doesn't the Fed do more to spur the economy?

By contrast the Post emphasizes the risk that Bernanke took with his quantitative easing policy. It told readers:

"But the central bank, with its decision last November, also put its reputation on the line, essentially shouldering responsibility for getting the economy on track. In that sense, the Fed now owns the crummy economy in the public mind to a degree that it wouldn’t have had Chairman Ben S. Bernanke and his colleagues followed a more cautious path in setting monetary policy."

Actually it is the Fed's mandate to maintain full employment, so Bernanke really does not have the option to decide to do nothing when the economy faces high unemployment due to a shortfall in demand. The only question is what is the most effective policy to raise demand. If he had opted to do nothing, then he should equally own the economy, assuming that the media reported the situation accurately.

The Post also wrongly asserts that Bernanke has set 2.0 percent as his inflation target. This is his target for the core inflation rate. This point is important because the overall inflation rate has been above 2 percent recently due to sharp increases in energy and food prices. However the core inflation has been just over 1.0 percent.

Comments (1)Add Comment
written by skeptonomist, April 27, 2011 8:36
Leonhardt says "the Fed has alternatives" to raise employment, but the ones he mentions are not substantive - the Fed is just supposed to announce that it will keep federal funds low (it has already done this over and over) and announce that it will tolerate higher inflation although current inflation is not near its target anyway. In other words, the Fed is supposed to use its "credibility" to will unemployment to go away although its "credibility" did not actually prevent the current situation from developing. It did take subtantive action in bailing out the financial industry with taxpayer money.

The Fed has shown in the past that it is perfectly willing not just to tolerate but to induce unemployment as high as 10.8%. It is foolish to rely on such an institution to either prevent or ameliorate unemployment. There is no real empirical evidence that its actions in the past have been more helpful than harmful - these articles continue a tradition in the media and even among economists of attributing any favorable turn in the economy to the wisdom of the Maestros and ignoring their obvious blunders.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.