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Paul Krugman on why Janet Yellen is the un-central banker

Editor’s Note: No one said the Federal Reserve’s job is easy. And if you believe Nashville money manager (aka econo-crooner Merle Hazard), it has a harder job than other central banks because it has not one but two mandates.

A Fed chair has to fulfill two, often conflicting, statutory expectations, and be ready for his or her every word to be minced by the market. Say too much about your future plans, as Ben Bernanke found out in the summer of 2013, and markets panic. But converse in Alan Greenspan “Fedspeak,” and people have no idea what you’re talking about. Having led the Fed’s communications overhaul during Bernanke’s tenure, Janet Yellen was widely expected to continue her predecessor’s transparency.

But Yellen’s actions in Massachusetts two weeks ago — first meeting (and selfie-snapping) with a group of unemployed people at a job-finding center, and later giving an address about economic opportunity — have unleashed widespread debate about what the Fed’s role is in achieving economic equality and where Yellen’s place is as a public figure. (The two-day incident even sparked a New York Times “Room for Debate” series.)

As New York Times columnist Paul Krugman told Paul Solman on the NewsHour Wednesday, he loved Yellen’s photo-op with the unemployed because it showed that she’s in tune with average Americans. Columbia University professor Charles Calomiris, however, whom we’ll hear from later on this page, wasn’t smiling about it. You can watch Paul’s Making Sen$e segment to get a better sense of that disagreement:

In the edited conversation between the two Pauls, below, Krugman explains how the dual mandate can be a dilemma, but why that’s not Yellen’s headache right now. The Fed, Krugman thinks, is actually missing both its targets — maintaining stable prices and maximum employment — but Yellen, by showing concern for the unemployed, Krugman believes, at least has her priorities straight.

In a subsequent post, Krugman will explain more about why he thinks the Fed stopped quantitative easing too soon and why inflation doesn’t pose an immediate threat.

— Simone Pathe, Making Sen$e Editor


Paul Solman: Being the Fed chair is tough, isn’t it, if you have to pursue a dual mandate?

Paul Krugman: Yeah, if you’re doing your job right, some substantial group of people [is] going to be mad at you. There’s no way to make everybody happy because there are two somewhat often conflicting objectives, although not right now. At the moment, they happen to be in accord, and the Fed is missing both of them.

Paul Solman: How so?

Paul Krugman: Well, unemployment is still too high and inflation is too low, by the Fed’s own standards, and even more so, according to some of us.

Paul Solman: But if the Fed were to simply maintain price stability, wouldn’t that inevitably solve the unemployment problem? I mean, you’d have an economy doing as well as it can do?

Paul Krugman: That’s what many people used to think. That’s why some of the Fed’s counterparts in other places have just an inflation mandate.

Paul Solman: You mean in other countries?

Paul Krugman: That’s right. That’s why the European Central Bank (ECB) just has an inflation mandate, not an employment mandate.

More and more, it looks as if that is not true. It looks as if an economy can be persistently depressed, [with] persistently high unemployment and prices will be stable. They won’t be deflating, they’ll even maybe be rising at 1, 1.5 percent a year.

Paul Solman: Which is what’s been happening now in this country.

Paul Krugman: It’s been happening here and in Europe; it’s positive inflation, although not much. We’re quite sure that Europe is deeply depressed. We think that we’re still substantially below capacity. So, it seems as if that single mandate doesn’t actually do the trick. It’s not the case that getting one OK is enough to make sure that everything else is OK as well.

Paul Solman: But can’t the Fed, or any central bank, overdue it? Overreact to high unemployment, for example, create too much money, and then eventually lead to inflation?

Paul Krugman: Sure. It can also overreact to inflation and cause a very serious recession. It’s not an easy job. It’s always a question of judging things, and sometimes you’re going to get it wrong, and fairly often they have. There’s also a problem of reacting too fast. It’s like an over-sensitive thermostat. If the heat reacts too fast, then the temperature in the room actually fluctuates more.

But right now, it seems very unlikely that the Fed would err by doing a lot. Because right now, the clear and present danger of a low inflation, maybe even deflation, trap seems a lot stronger than the risk of possibly overshooting on inflation for awhile.

Paul Solman: But, even at an inflation target of 2 percent, in about 30 years, 35 years, the dollar loses half its value, right?

Paul Krugman: Yeah. But, how many people are really going to find their lives disrupted because 35 years from now, the dollar will be worth about half of what it is now versus the people who find themselves disrupted because the economy is depressed? With inflation so low, the Fed can’t get any traction getting us out of the depression.

Paul Solman: And so that’s why there’s this problem of the dual mandate?

Krugman: Yeah. The problem with the dual mandate is that it’s not enough to just look at one number to tell whether the Fed is doing its job. And sometimes, the two numbers will give you different signals. So there will be times in particular when prices are looking OK, but unemployment is very high, and some people like me are saying, “Do more.” And other people are saying, “No, prices are stable.” And then there are times when, at least for a little while, prices are rising too fast, or above target, but unemployment is still high. And then there’s going to be conflicting signals.

I actually don’t think the Fed’s problems right now come from the dual mandate. The truth is, would you rather be Janet Yellen or [ECB president] Mario Draghi? I would certainly rather be Janet Yellen right now because Draghi has an impossible situation, even though he’s on a single mandate.

His problem is that Europe is sliding towards lower and lower inflation, and maybe deflation, and he doesn’t seem to have the tools to get out of it. So even though he’s got a very clear mandate — 2 percent inflation — he can’t get there.

To the extent that there’s a problem with Yellen right now, she’s got unemployment that’s above target, and inflation that’s below target, and everything says step on the gas, except her pedal is already to the metal.

Is 6 Percent Unemployment What It Used to Be?

Paul Solman: But unemployment has been coming down, it’s now below 6 percent…

Paul Krugman: The numbers may not mean what they used to. So the unemployment rate is down, but the employment rate — the fraction of people of working age who are actually working — is still very low by recent historical standards. How much of that is fundamental changes in our society? How much of that is people aren’t working because they can’t find jobs? We actually don’t know.

We do know that one way to tell if the labor market is really tight is to look at whether there are jobs available, look at wages. Wages are going nowhere. This feels like a very weak labor market.

I remember 6 percent unemployment in the days when we used to think that 6 was full employment. Jobs were abundant, wages were rising. It doesn’t feel that way now, so, whatever that number may say, there’s probably a lot of people looking for jobs or looking for full-time jobs that can’t find them.

Why Yellen Is One of Us

Paul Solman: When Janet Yellen has her picture taken with a bunch of unemployed people, what’s that about? And, are you reassured or somewhat concerned when you see the arguably propagandistic slant of that photo op?

Paul Krugman: I’m actually reassured, for a couple of reasons. One is I want to know that she has her priorities straight. She’s saying, “I care about the unemployed a lot,” which says to me people like me, “I’m on your side.”

We actually have a credibility issue. The Fed not only has to do everything it can to promote growth right now, but it has to be seen to have that as a priority. Because expectations are very, very important here.

You know, in normal times you want the Fed to be credibly ready to stand against any hint of inflation.

Paul Solman: That’s the hawkish position.

Paul Krugman: That’s right, that’s the hawkish position. It’s that old line: the Fed’s job is to take away the punch bowl just as the party really gets going. But here, the Fed’s job is to promise people it will, in fact, keep the punch going until the economy is really seriously revived. And so by saying “I really care a lot about the unemployed,” Yellen is actually hoping to create that expectation as well.

So, it’s actually a very shrewd move on her part to be so un-central banker-like because this is a time when conventional central banking is not what we need.

Paul Solman: But doesn’t she then raise expectations that she may not be able to fulfill?

Paul Krugman: Well, that’s a problem that’s always here. It’s one of the hard things about dealing with the kind of problem we’re in. The central bank is trying to get people to believe that it will break you out of a deflationary trap, and that’s by no means assured.

But, you know, the embarrassment for the Fed is not an important issue compared to mass unemployment. So, it’s far better for the Fed to do what it can, and take the risk of looking less competent than to refuse even to try. Yellen’s got her priorities straight there.

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