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If We Had 10% Inflation and 1.2% Unemployment, Ben Bernanke's Hair Would Be on Fire

But it isn't: we have 10% unemployment and 1.2% inflation instead

Dan Gross:

Print: The central bank says it has a trio of missions... maximum employment, stable prices, and moderate long-term interest rates.... In a speech earlier this month, Bernanke noted that "in all likelihood, a significant amount of time will be required to restore the nearly 8-1/2 million jobs that were lost nationwide over 2008 and 2009." In another recent speech in Michigan, he acknowledged that "high unemployment imposes heavy costs on workers and their families, as well as on our society as a whole." But he doesn't seem inclined to do anything about it.... Could Bernanke go down in history as the Federal Reserve chairman who won the crisis but lost the recovery? If I were in Congress, in the White House, or at the Fed, and we were facing 9.7 percent unemployment, my hair would be on fire.... When the crisis hit, as David Wessel showed in In Fed We Trust, Bernanke acted with courage, urgency, and imagination. He used all the Fed's powers, and some it may not have possessed, to avert collapse. His actions won him reappointment to a second term.

But he's showed no such urgency in grappling with high unemployment....

I think there are two more compelling explanations. First, it could be that Bernanke and the Fed are simply exhausted. In 2008 and 2009, the central bank did everything in its power and then some to rescue the economy from depression. It took rates to zero, lent directly to companies, and expanded the Fed's balance sheet massively. More recently, it has bought $1 trillion of mortgage-backed securities to prop up the ailing housing market. The Fed used up all its resources saving the system. Now it's time for the political system and the private sector to do their thing.

Second, it could be a failure of imagination.... Bernanke and the Federal Reserve have proved themselves to be poor predictors of how big macroeconomic trends... can have negative social, economic, and political impacts.... So perhaps it's not surprising that the Fed doesn't see how persistent long-term unemployment can erode labor force skills.... [P]ersistent excess capacity in the labor force limits the ability of workers at all levels to get higher wages and better benefits. It's bad for government finances, as payroll taxes provide an important source of revenue. It's bad for the housing market and for the financial sector as a whole...