This is a long postponed blog post simply because I know that it would be long and would take much effort. Ben Bernanke (BB), the former Chairman of the Federal Reserve Board, has been a vigorous blogger since he took up blogging late in March this year. This blog (TGS) has already blogged on two of his posts. But, must confess that I lost interest after that not because I did not disagree with his posts. I did and I do. But, that the man was exasperating. He admits to no errors. He is soft-spoken but aggressive in attacking others. His soft-spoken demeanour and image belies a fierce and unrepentant attitude towards those who hold contrarian views. From Larry Summers to German government to global savers to fellow academics – everyone else is wrong and he has never done or said anything that he would regret. He is a fit case for study at the Daedalus Trust that studies hubris among political leaders in the US and in the UK. The Trust should extend it central bankers too, perhaps.
He said Germany was not doing enough to boost aggregate demand. You can read his posts on Germany here and here. If German businesses had to pay more wages to boost consumption, then they cannot be simultaneously expected to boost their capital expenditure. In any case, the last time I checked German wage growth has been better than in the US. I checked German labour cost and America’s in nominal terms and in real terms. I compared the annual growth in America’s Employment Cost Index and German ‘Total Labour Costs’. In the new millennium, before the crisis, the annual growth in ECI in the US was higher than that of annual growth in German Total Wages. But, after the crisis, the difference has shrunk significantly and has even turned negative. I will be more precise. In the six years from 2009 to 2014 (both included), the growth in German Total Wages has exceeded the growth in American ECI in three of those six years (2009, 2011 and in 2012). In 2010, 2013 and in 2014, American ECI has grown faster but the magnitude was much smaller. In fact, in the years in which German Total Wages growth exceeded America’s, the magnitude was larger.
Let us take real wages data from OECD (2013 prices). German real wage growth has exceeded America’s in four of the six years from 2008 to 2013. Before that, it had exceeded only once from 2001 to 2007. Clearly, post-crisis, America has done a very poor job of paying its workers. One of the reasons why America’s savings rate has been so low. Usually, it improves after crises. But, America has been an exception since policies pursued in the US after the 2008 crisis had encouraged the opposite. More than the rest of the world having a savings problem, America has a consumption problem. I had also blogged on it here. Even the most recent trade balance data (March 2015) confirms it.
He picked up a fight with the Wall Street Journal because it dared to ask the Federal Reserve to begin restoring normal monetary policy. He criticised them for raising the bogey of inflation which, according to him, never arrived, despite the ultra-loose monetary policy of the Federal Reserve Board. That is a cheap shot. Let us look at one example of how the computation of consumer prices is badly distorted by hedonic price adjustments. As claimed by David Stockman, the Bureau of Labour Statistics index of prices for new vehicles has gone up by 1.14% since 1997 January until 2015 February (146.735 in Feb. 2015 over 144.600 in January 1997). Try telling that to someone who shop for a new car in the US. I shall leave it to David Stockman to explain it here:
According to the BLS index, new car prices have risen by only 1% since 1997! That’s right, back when Bill Clinton was being sworn in for his second term, the new car price index stood at 145 and according to the BLS, its just 147 today.
Well, now. According to readily available public information, the average new car price in 1997 was $17,000 compared to about $33,000 today. Most assuredly, the average worker needing a car to get to his job and to transport his family to Wal-Mart would recognize the real world gain of 95% during the last two decades, not the BLS fiction of 1%. Just because today’s new cars have eight air bags, navigation systems and run-flat tires—- it doesn’t mean that new car price inflation has vanished. This is hedonics gone haywire. [Link]
Even with such massive suppression of price increases using questionable, subjective and even arbitrary hedonic price adjustments, the Real Median Household Income in the US peaked at just under USD57K in 1999 and stood at just under USD52K in 2013 (Source: FRED database of the Federal Reserve Bank of St. Louis). Imagine the true real median household income using prices not distorted by hedonic adjustments. Has monetary policy not played any role in such a massive erosion in real median household income in the United States?
Even for the credit that Bernanke took for having reduced the unemployment rate (which is largely due to the declining participation rate), David Stockman had a good answer. The index of Hours worked by all persons in the non-farm business sector in the United States has barely undergone a change since the new millennium! He is correct. I verified it. The index has barely changed since the year 2000.
The Wall Street Journal hit back rather well:
We learned in school that something isn’t a theory if it can’t be tested. Mr. Bernanke’s theory of post-crisis monetary policy is that if it’s working, then do more of it. And if it’s not working, then do more of it too. This isn’t data-driven monetary policy.
Mr. Bernanke also says that we “argue (again) for tighter monetary policy.” If lifting the fed-funds rate to 50 or 100 basis points after six years of near-zero policy is tighter money, then we plead guilty. [Link]
Then, there is an asset bubble to account for, with all its consequences for inequality of wealth and income, for depriving savers of their incomes, for distortions in market prices, for encouraging speculation as opposed to investment, etc.
As CPI is doctored and all inflation is wrung out of it through statistical methods, the only thing that is left for monetary accommodation to achieve is asset price inflation and not capital formation. There is nothing for Mr. Bernanke to feel proud of, about his monetary policy decisions and actions.
He has recently joined Citadel (a hedge fund) and the bond fund PIMCO as an advisor. This undermines the moral authority of regulatory institutions and regulators greatly. The incestuous behaviour that it encourages between the private sector and the public sector causes great damage to financial and economic stability because it persuades regulators to adopt a soft-touch approach when they are in office, lest they jeopardise their chances of being employed or hired as consultant by the private sector. Worse, they may even bestow favours. This tongue-in-cheek post captures the ‘conflict of interest’ that is rich in both the assignments that he has taken up.
In some sense, he is one of the big risks today to the reputation and moral credibility of central bankers and the institutional credibility of central banks worldwide.
More on his vacuous advocacy of so-called ‘macroprudential’ measures to safeguard financial stability in the next post.