Bernanke's 'Deadweight' March 22, 2006; Page A16
Congratulations to new Federal Reserve Chairman Ben Bernanke, who addressed the Economic Club of New York Monday and managed to confuse the financial press about monetary policy more thoroughly than even Alan Greenspan used to.
Yesterday's papers contained acres of analysis suggesting that Mr. Bernanke had said that the current low long-term bond yields could be caused by any number of factors that could lead to either higher (or lower) short-term interest rates, and in any event meant that central bankers had to be flexible and rely on all sorts of economic indicators rather than get pinned down by one or two. Or something like that. With remarks of such studied opacity, Mr. Bernanke is well on his way to joining the central banker hall of fame.
On the other hand, we also heard his speech and think Mr. Bernanke did make news on fiscal policy. One of the evening's questioners, Columbia Business School Dean (and Journal contributor) Glenn Hubbard, pointed out that Mr. Bernanke's recent criticism of budget deficits had received wide attention. Mr. Hubbard wanted to know if the Fed chief believes it matters to economic growth how deficits are lowered -- whether by spending reductions or tax increases?
Mr. Bernanke replied that there was a "big difference" between having the deficit balanced at, say, 15% of GDP versus 25% of GDP. That difference was in the "resources" that are taken out of the private economy that could otherwise be put to productive use. He also cited Milton Friedman's famous analysis of the "deadweight loss" and "extra burden" on economic growth that often exceed the direct cost of greater government spending.
Ultimately, the Fed chief added, any answer to the question depends on how much you value the things that government would spend the money on. This is surely true. But we think we heard Mr. Bernanke saying as clearly as any central banker every will that policy makers need to appreciate there is a cost in lower economic growth and efficiency from higher taxes. This isn't a message that goes down well with a financial press that largely agrees with Robert Rubin that tax increases are urgently needed. But we thought it was a useful warning from a new Fed chairman who may be around for a while, and that our readers might even like to know about it.
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