Views on the Greenspan Succession - High Oil Prices Put Pressure On U.S. Trade Balance in June

National Review Strikes Again!

Mark Thoma tells us that the know-nothings at National Review are launching hit pieces on Ben Bernanke. Mark attempts the tas of cleaning out the entire stable. I'm just going to deal with the first piece of horsesh-t I come across:

John Tamny on Ben Bernanke and the Federal Reserve on NRO Financial: Bernanke asked how much demand in the latest quarter “appears to have been satisfied out of inventories rather than from new production.” But supply-siders don’t even consider this — they don’t because they know that products are ultimately bought with other products. “Demand” will always exist, as human wants are unlimited. But what Bernanke deems “demand” is in fact producers offering up their surpluses for those of others. In the supply-side model, what Bernanke sees as a fall in aggregate demand is in fact a fall in production — something supply-siders agree results from governmental meddling along the lines of excessive taxation, regulation, and unstable money...

Bernanke's point is that in the second quarter households, the government, and investing businesses bought one-half percent more goods and services than U.S. producers made and U.S. businesses (net) imported. Thus inventories are now below levels that businesses think they need to run their operations efficiently. In the next several quarters, therefore, businesses are going to ramp up production in order to build their inventories back to a comfortable level. This is an important thing to notice. It is not a contentious or a disputed point--except to the likes of John Tamny.

Tamny is enraged that Bernanke is thinking about fluctuations in employment and capacity utilization at all. We, Tamny says, "don't even consider this" because "'[d]emand' will always exist, as human wants are unlimited.... [W]hat Bernanke sees as a fall in aggregate demand is in fact a fall in production..." Let us not comment on the fact that Tamny is too stupid to notice that what Bernanke is talking about is not a fall but a rise in aggregate demand: that's just too embarrassing for words. Let us, instead, comment that Bernanke is talking about a fact about the world--that spending was larger than production in the second quarter. And Tamny's response is that that fact doesn't exist: because "products are ultimately bought with other products," spending cannot be anything other than equal to production. In Tamny's world, theory proves that fluctuations in unemployment and capacity utilization are logically impossible.

Now there was an economic theory that held that fluctuations in unemployment and capacity utilization were logically impossible: that supply was automatically equal to demand. That theory is called "Say's Law," after nineteenth-century French economist Jean-Baptiste Say. That theory wrong: there are fluctuations in unemployment and capacity utilization. And because that theory is wrong, we have the Federal Reserve. One way to think about the Federal Reserve's mission is that it's job is to try to make sure that spending is matched to production--to make Say's Law true in practice, even though it is not true in theory.

Bernanke's attention to the details of aggregate demand is, of course, on of the reasons that he is exceptionally highly qualified to chair the Federal Reserve.