How the Fed Saved the Economy / By BEN S. BERNANKE

How the Fed Saved the Economy

Full employment without inflation is in sight. The central bank did its job. What about everyone else?

By BEN S. BERNANKE

Oct. 4, 2015 6:13 p.m. ET

For the first time in nearly a decade, the Federal Reserve is considering raising its target interest rate, which would end a long period of near-zero rates. Like the cessation of large-scale asset purchases in October 2014, that action will be an important milestone in the unwinding of extraordinary monetary policies, adopted during my tenure as Fed chairman, to help the economy recover from a historic financial crisis. As such, it’s a good time to evaluate the results of those measures, and to consider where policy makers should go from here.

To begin, it’s essential to be clear on what monetary policy can and cannot achieve. Fed critics sometimes argue that you can’t “print your way to prosperity,” and I agree, at least on one level. The Fed has little or no control over long-term economic fundamentals—the skills of the workforce, the energy and vision of entrepreneurs, and the pace at which new technologies are developed and adapted for commercial use.

What the Fed can do is two things: First, by mitigating recessions, monetary policy can try to ensure that the economy makes full use of its resources, especially the workforce. High unemployment is a tragedy for the jobless, but it is also costly for taxpayers, investors and anyone interested in the health of the economy. Second, by keeping inflation low and stable, the Fed can help the market-based system function better and make it easier for people to plan for the future. Considering the economic risks posed by deflation, as well as the probability that interest rates will approach zero when inflation is very low, the Fed sets an inflation target of 2%, similar to that of most other central banks around the world.

How has monetary policy scored on these two criteria? Reasonable people can disagree on whether the economy is at full employment. The 5.1% headline unemployment rate would suggest that the labor market is close to normal. Other indicators—the relatively low labor-force participation rate, the apparent lack of wage pressures, for example—indicate that there is some distance left to go.

But there is no doubt that the jobs situation is today far healthier than it was a few years ago. That improvement (as measured by the unemployment rate) has been quicker than expected by most economists, both inside and outside the Fed.

On the inflation front, various measures suggest that underlying inflation is around 1.5%. That is somewhat below the 2% target, a situation the Fed needs to remedy. But if there is a problem with inflation, it isn’t the one expected by the Fed’s critics, who repeatedly predicted that the Fed’s policies would lead to high inflation (if not hyperinflation), a collapsing dollar and surging commodity prices. None of that has happened.

It is instructive to compare recent U.S. economic performance with that of Europe, a major industrialized economy of similar size. There are many differences between the U.S. and Europe, but a critical one is that Europe’s economic orthodoxy has until recently largely blocked the use of monetary or fiscal policy to aid recovery. Economic philosophy, not feasibility, is the constraint: Greece might have limited options, but Germany and several other countries don’t. And the European Central Bank has broader monetary powers than the Fed does.

Europe’s failure to employ monetary and fiscal policy aggressively after the financial crisis is a big reason that eurozone output is today about 0.8% below its precrisis peak. In contrast, the output of the U.S. economy is 8.9% above the earlier peak—an enormous difference in performance. In November 2010, when the Fed undertook its second round of quantitative easing, German Finance Minister Wolfgang Schäuble reportedly called the action “clueless.” At the time, the unemployment rates in Europe and the U.S. were 10.2% and 9.4%, respectively. Today the U.S. jobless rate is close to 5%, while the European rate has risen to 10.9%.

Six years after the Fed, the ECB has begun an aggressive program of quantitative easing, and European fiscal policy has become less restrictive. Given those policy shifts, it isn’t surprising that the European outlook appears to be improving, though it will take years to recover the growth lost over the past few years. Meanwhile, the United Kingdom is enjoying a solid recovery, in large part because the Bank of England pursued monetary policies similar to the Fed’s in both timing and relative magnitude.

It is encouraging to see that the U.S. economy is approaching full employment with low inflation, the goals for which the Fed has been striving. That certainly doesn’t mean all is well. Jobs are being created, but overall growth is modest, reflecting subpar gains in productivity and slow labor-force growth, among other factors. The benefits of growth aren’t shared equally, and as a result many Americans have seen little improvement in living standards. These, unfortunately, aren’t problems that the Fed has the power to alleviate.

With full employment in sight, further economic growth will have to come from the supply side, primarily from increases in productivity. That means that the Fed will continue to do what it can, but monetary policy can no longer be the only game in town. Fiscal-policy makers in Congress need to step up. As a country, we need to do more to improve worker skills, foster capital investment and support research and development. Monetary policy can accomplish a lot, but, as I often said as Fed chairman, it is no panacea. New efforts both inside and outside government will be essential to sustaining U.S. growth.

Mr. Bernanke, chairman of the Federal Reserve from 2006-14, is the author of “The Courage to Act: A Memoir of a Crisis and Its Aftermath,” out Oct. 5 (W.W. Norton).

http://www.wsj.com/articles/how-the-fed-saved-the-economy-1443996826

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Bernanke Says His Plan Worked

The former Fed chair has a memoir, plus breaking the higher-ed monopoly and a plan to squeeze Putin.

By JAMES FREEMAN

Updated Oct. 5, 2015 7:35 a.m. ET

Former Federal Reserve Chairman Ben Bernanke argues in the Journal that his policies led to a better job market without stoking inflation. Mr. Bernanke, who has a memoir out today, claims that Fed programs were a “critical” advantage for the U.S. over Europe. “Europe’s failure to employ monetary and fiscal policy aggressively after the financial crisis is a big reason that eurozone output is today about 0.8% below its precrisis peak. In contrast, the output of the U.S. economy is 8.9% above the earlier peak—an enormous difference in performance,” writes Mr. Bernanke. “In November 2010, when the Fed undertook its second round of quantitative easing, German Finance Minister Wolfgang Schäuble reportedly called the action ‘clueless.’ At the time, the unemployment rates in Europe and the U.S. were 10.2% and 9.4%, respectively. Today the U.S. jobless rate is close to 5%, while the European rate has risen to 10.9%,” adds the former Fed chairman.

“By enacting new sanctions on Russia, U.S. lawmakers can send a strong signal to Moscow that its continued aggression against Ukraine and growing complicity in a genocidal war in Syria will come at a heavy price,” write Paula Dobriansky and David Rivkin . The Russian oil industry is particularly vulnerable, say the authors. “Most of Russia’s approximately 50 major refineries date to the Soviet period. According to a 2014 report prepared for Russia’s parliament, the refiners...require a steady supply of Western, particularly American, equipment. Current U.S. sanctions apply only to new Russian oil and gas production projects. But an embargo—even if only a unilateral one by the U.S.—on exports of refinery pumps, compressors, control equipment and catalytic agents would cause widespread shortages of refined products, putting tremendous pressure on Russia’s civilian economy and Moscow’s ability to carry out military operations.”

Our columnist Gordon Crovitz weighs in on Sen. Elizabeth Warren’s political assault on think-tank scholar Robert Litan. “Ms. Warren’s inquisition isn’t about ethics but about suppressing cost-benefit analysis, which until the Obama era was a bipartisan approach to identifying regulations doing more harm than good,” writes Mr. Crovitz.

Sen. Marco Rubio is taking on the higher-ed racket, notes a Journal editorial. “Students can’t use federal aid at colleges that aren’t accredited, yet a school usually must serve students for years before winning approval. Accreditation amounts to monopoly enforcement,” writes the editorial board.

Imagine a country where “mob bosses are living legally throughout the country, having forfeited neither their assets nor their arms.” That’s the nightmare scenario our columnist Mary Anastasia O’Grady foresees as President Obama and the Pope encourage a peace deal with Colombia’s narco-terrorists.

http://www.wsj.com/articles/bernanke-says-his-plan-worked-1444044379