When Federal Reserve chairman Ben Bernanke announced a new round of unconventional monetary stimulus last month, he couched it in the language of grim necessity, saying:
The employment situation…remains a grave concern…Fewer than half of the 8 million jobs lost in the recession have been restored…5 million Americans have been unemployed for more than six months, and millions more have left the labor force—many of them doubtless because they have given up on finding suitable work.
That was the rationale for an aggressive new effort to buy $40 billion worth of long–term mortgage–backed securities per month until…well, who knows? And the chairman said the Fed would keep the federal funds rate—now at 0.25%—at “exceptionally low levels” through mid–2015, six months longer than previously planned.
In a speech in Indianapolis Monday that’s well worth reading, Bernanke claimed that
although monetary policy cannot cure the economy's ills,…we do think it can provide meaningful help. So we…are going to do what we can do and trust that others, in both the public and private sectors, will do what they can as well.
Trust whom? Congress? The Obama administration?
Bernanke’s new policy was an implicit admission that despite everything his agency—and Congress, and two presidents, with TARP, various stimulus programs, and tax cuts—had done, the economy and employment were still in a rut.
In other words—mine, not his—the Fed had failed to accomplish its goals. (I’m sure the chairman would disagree, although Fed spokespeople didn’t respond to my request for comment by deadline.)
Bernanke went to great lengths to defend his actions. In his speech at the Kansas City Fed’s annual economic meeting in Jackson Hole, Wyoming in August, he actually tried to quantify how successful his various rounds of “quantitative easing” were—in academic lingo that made the wonkiness of Wednesday’s presidential debate sound like a series of clever ad jingles.
He said simulations done by the Fed showed the policies “have provided significant help for the economy…As of 2012, the first two rounds of [quantitative easing] may have raised the level of output by almost 3% and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred.”
This is pretty striking—I’ve never heard a Fed chairman pound the table for his actions like this.
The studies he cited were primarily by Fed economists. One, by Hess Chung and several others, was published in an external peer–reviewed journal—and please stay with me for a couple of paragraphs here.
That study said the Fed’s first round of quantitative easing in 2009 probably lowered long–term bond yields by 50 basis points, or half a percentage point, suggesting that “private payroll employment is currently 1.8 million higher, and the unemployment rate three–quarters of a percentage point lower, than would otherwise be the case,” the authors wrote.
Two economists at the Boston Fed, Jeffrey Fuhrer and Giovanni Olivei, said that QE2, which ran from late 2010 through mid–2011, could “be expected to raise real GDP by 60–90 basis points.” That “implies a decline in the unemployment rate of 30–45 basis points” or “an increase of about 700,000 jobs,” they concluded.
So there you have it: A $2 trillion increase in the Fed’s balance sheet may have gotten you roughly 2.5 million jobs, about what several outside economists say the Obama administration’s stimulus plan saved or created.
It also was close to the 2 million jobs I estimated the Bush tax cuts may have helped create in the mid–2000s.
Who can claim any of these was a big success?
And that’s the problem. Three big policy initiatives based on three different economic philosophies all have failed to spur employment in the past decade.
- President Obama’s various Keynesian stimulus initiatives, which without tax cuts amounted to about $600 billion, have yielded modest results.
- Supply–side tax cuts, which Republicans still trumpet as the cure for whatever ails the economy, demonstrably did not produce many jobs during the Bush years. And by the way, did you know that President Obama’s own economic plans from 2009 through 2011 included over $500 billion in tax cuts,not including the two–year extension of the Bush tax cuts?
- And now, the unconventional monetary policy of the Federal Reserve, based on the theories of the great Milton Friedman, have fallen short as well.
“I don’t think what the Fed has done has had a huge impact,” said James Hamilton, an economics professor at UC San Diego. “I think the steps they took have helped prevent the situation from getting much worse.”
I’m among those who think the Fed should be a little cautious and humble about what they can do. I don’t think the Fed can solve all the problems.
Ben Bernanke might agree. In his Indianapolis speech this week, he said: “Monetary policy is no panacea.” That’s true for supply–side tax cuts and Keynesian stimulus as well. These policies may have prevented the very worst—another Great Depression—but they still haven’t produced a good recovery.
Keep that in mind when you listen to presidential candidates push ideas that in recent years just haven’t delivered the goods.