Tuesday, October 25, 2005
Second: I read this in the Wall Street Journal's editorial this morning on the Bernanke nomination.
The modern Fed Chairman is also in a sense the nation's chief economist, so Mr. Bernanke will be heard from on everything from fiscal policy to Fannie Mae.
If that is true, it certainly is something arising from Greenspan. I doubt many people thought of Volcker per se as an economist. And its history with Federal Reserve chairmen that were academic economists, most notably Arthur Burns, isn't that wonderful -- Burns, after all, gave us the inflation of the Nixon-Ford era. But in another sense this is true: The Federal Reserve keeps on staff, both in Washington and at the twelve regional Federal Reserve Banks, a highly skilled group of researchers. This is true in many central banks. When I work overseas and need economic insight from locals, the first place I stop is with the central bank's research department. The Bank of Italy, for example, long held the reputation of having a group of independent researchers able to give objective policy advice in a very partisan Rome.
That reputation in the U.S. has continued and prospered under Greenspan, who more than most previous chairmen engaged the Board staff in discussions of economic indicators and research into alternative monetary policy rules (including the inflation targeting as Bernanke has favored.) Donald Kohn, who was a short list candidate for the chairmanship himself, has been both on the staff, been its head, and is a governor. He spoke last year about the role of the Fed staff:
When the Federal Reserve started its operations in 1914, aggregate data for the United States were virtually non-existent. Early research efforts at the Federal Reserve included the pathbreaking compilation of statistical indexes that permitted policymakers, for the first time in the nation's history, to monitor macroeconomic developments with some degree of accuracy. Besides measures of credit and indexes of industrial production that the Federal Reserve still produces today, during those early years the Board staff developed and published various other indexes for such critical concepts as aggregate sales, employment, payrolls, and prices.
This is still true in the countries in transition that I visit today. (Some of the advice they receive from advisors like me relates to data quality and dissemination.) And one of the things Greenspan did, Kohn notes, is to get the people who did operational research -- if we buy $X million of bonds on the open market today, what happens to the Fed funds rate tomorrow -- together with the longer-range researchers. The result, Kohn says, is positive.
This move not only improved morale [by eliminating some jealousies], it also led to a cross-fertilization of ideas that improved the quality of both research and policy analysis. Researchers actively engaging in policy analysis and participating in Federal Open Market Committee preparations better understand the issues facing policymakers and can target their efforts. On occasion--rare, I suspect--research economists actually benefit from the ideas of the policymakers. They also come to appreciate that policymakers need to hear sensible stories in clear English about the concepts being presented so that the policymakers in turn can explain understandably to the public why they are following a particular strategy. Getting some researchers to write in English has proved daunting, and too often, the policymakers themselves have not lived up to their side of the bargain.
One of the reasons I thought Martin Feldstein would have made an excellent choice is that he strikes me as the guy whose experience as a policymaker, a research director (at NBER) and a principles teacher at Harvard would have allowed for more benefits of cross-fertilization than other candidates.
So the role of research at the Fed has evolved over time, but it should be stressed that Bernanke will not present simply his own views on economics. He represents an institution that has a large group of researchers and a Board staff that helps influence what comes out in the Fed's public statements.
Those who think the Fed has been too inflationary of late, agreeing with the rest of the WSJ editorial this morning, may also wish to read Frank Shostak this morning. Here's the nub of my disagreement with Shostak's view: We can agree that the inflation would be stopped by a cessation of printing money. I.e., stopping money creation is a necessary and sufficent condition for stopping inflation. But that does not mean that starting money creation is a necessary and sufficient condition for starting inflation.
I haven't written yet about the "global savings glut" issue that Bernanke is known for; I'll come to that tomorrow.