As those familiar with my writing know, I was never a fan of erstwhile Federal Reserve Chairman Ben Bernanke. Indeed, while some praised him as “the greatest central banker in U.S. history,” I thought otherwise.
In trying to give Bernanke every benefit of the doubt, I have wondered whether some of the pernicious policies he adopted at the Fed were not the result of his own economic convictions, but instead were forced on him by intense political pressures. Surely, I thought, no economist could really believe that creating money produces prosperity or that suppressing the pricing mechanism that coordinates present with future economic activity (i.e., interest rates) is prudent. Alas, it appears I was wrong.
Now that he is a private citizen again, I have wondered whether Bernanke might change his tune. In a word, “no.” Recently, an entry from Bernanke’s new blog found its way into my inbox. In this blog post, Bernanke dispensed advice to Germany that was unimaginative, unadulterated Keynesian orthodoxy—a flawed theoretical paradigm with a dismal track record. Tragically, the ghost of Keynes still haunts us today.
In writing about Germany’s trade situation, Bernanke casts the problem in Keynesian terms, asserting that there is insufficient “aggregate demand” today. According to this view, the problem is that people aren’t spending enough on consumption. Shame on them! Therefore, it’s up to the government to correct this mistake. Here we see the close similarity between macro-economic policy prescriptions and socialist central plans: In both cases, the elite planners act like puppeteers, trying to pull the strings to make them do what the planners think they should be doing—as if they know better than the people what the people want or should want to consume.
In the macro paradigm that Keynes devised, the micro perspective of acting, choosing individual human beings is lost. For macro strategists to assert that a population is making a collective mistake in how much they demand ignores the fact that all of the individuals comprising the collective are making the right decisions for themselves. Who is Bernanke or any other economist to claim that they aren’t spending enough? There are many valid micro-economic explanations for why individuals and businesses limit their spending: Perhaps they simply don’t need or want any more of certain products; perhaps they would purchase more if prices were lower; perhaps they are burdened by debt from previous expenditures; perhaps they prefer to save some of their income for future instead of present consumption. Whatever the reason(s), markets will communicate the necessary price information to reshape economic production to align more closely to people’s preferences—or at least they will if public officials don’t intervene and falsify those signals through fiscal or monetary policy. Those in power do not know how much demand there “should be” in specific markets, and government attempts to “correct” market behavior is counterproductive economic quackery.
In his blog post, Bernanke makes several specific recommendations to Germany:
First, he says that spending more money to improve Germany’s transportation infrastructure would “increas[e] domestic income and spending, while also raising employment and wages.” Has Bernanke so soon forgotten President Obama’s 2009 non-stimulating “stimulus plan,” under which a massive increase in infrastructure spending produced no uptick in economic growth and employment? Government spending does not increase wealth, but merely redirects it. Jobs created by government spending are offset by an equal or larger number of jobs that cease to exist or do not get off the launching pad when scarce economic resources are diverted from the private sector to additional public-sector activity (Bastiat’s lesson about “the things not seen”).
Second, Bernanke writes, “German workers deserve a substantial raise, and the cooperation of government, employers, and unions could give them one.” This is a normative statement, a personal opinion, not a specimen of economic analysis. Whether German workers deserve or should get a raise is a matter for markets to determine, not some economist. Surely, Bernanke knows that wages are a price phenomenon and that artificially raising wages above the market-clearing price is a formula for higher unemployment. Do some German workers “deserve” to lose their jobs?
Third, Bernanke recommends that Germany’s government facilitate increased spending through targeted “tax incentives for private domestic investment; the removal of barriers to new housing construction; … and a review of financial regulations that may bias German banks to invest abroad rather than at home.” Here, I see a glimmer of hope that Bernanke is not so completely in thrall to Keynesian mysticism, for he recognizes the importance of incentives to individual economic actors. However, he still has the state’s role backward. The first rule of the economics profession should be the same as it is in the medical profession: first do no harm—in other words, before even trying to do something beneficial, make sure you’re not doing something harmful. Thus, rather than advocating targeted tax incentives to promote desired actions, the correct recommendation would be to remove existing disincentives (taxes, etc.) that impede investment.
For the rest of this wish list, though, Bernanke is on target when he recommends removing the political shackles that limit and hamstring economic activity. Government intervention—whether in the form of taxes, spending, regulation, or monetary manipulations—warps market signals and thus distorts economic decision-making. What Germany needs, as Bernanke implies in his third recommendation, is less government interference with markets.
The problem, though, is that by viewing the situation through a Keynesian macro-economic lens, Bernanke wants to pick and choose which markets to liberate from stifling government restrictions—there is the puppeteer mentality again. The true path to prosperity is for all markets to be liberated from the quack tinkering of master planners and be allowed to develop freely within the context of the rule of law. Maybe Ben Bernanke will arrive at that conclusion some day. Until then, we can be glad that he isn’t in a position of power any longer and that, for the moment at least, we here in the States aren’t the target of his flawed Keynesian advice.
