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Why hasn't the economy grown faster since the big crash in 2008, and how can it now? That's as much the job of Ben Bernanke, chairman of the Federal Reserve Bank, as the president's. A scholar of the Great Depression, Bernanke had the Fed prevent inflation risked by the bailouts Bush and Obama approved so the economy wouldn't crash like it did 80 years prior. While the record-low interest rates he put in place may have staved off worse damage by priming investment in the private sector, they didn't convince businesses to scale back to prerecession levels—unemployment remains high, and after a couple of years that started to bother some economists, like Paul Krugman, who point out that the Fed is mandated to balance unemployment as well as inflation. Last month, Bernanke caved, and to combat unemployment he's turned to a promising idea developed here, by Chicago Fed president Charles Evans. The day Bernanke announced the aggressive bond-buying program tied to employment numbers that Evans had boosted for two years now, the stock market jumped like a frog for a fly, and I'm surprised more people in Chicago haven't been gloating about it.
A "mild-mannered policy wonk," according to an extensive Tribune profile this June, Evans outlined the problem Bernanke wasn't fixing in a sort of victory-lap speech he gave this September, a week after the Fed announced it would act:
Our economy today is simply not resilient enough. The damage from the Great Recession was substantial; and to date, the recovery has been disappointing. The real value of goods and services produced in the U.S. today is probably more than 5 percent below what economists call potential — that is, the economy’s ability to produce goods and services without generating inflationary pressures. The unemployment rate has been stuck at around 8 percent for nearly a year — well above the 5 percent to 6 percent level we would see if all of our resources were fully engaged. In the absence of further monetary stimulus or fiscal repair, the outlook would be for more of the same: moderate growth that is not strong enough to generate substantial improvement in the labor market; an unemployment rate that is likely to remain above its long-run level for a long time to come; and an economy that would be vulnerable to shocks at home and abroad.
In a 2011 speech, Evans proposed taking action by making "a simple conditional statement of policy accommodation relative to our dual mandate responsibilities," those responsibilities being keeping both inflation and unemployment low. The argument is that the economy will react positively if the Fed restrains already-low interest rates and injects money into the economy until unemployment dips enough (to 7 percent), even at the cost of slightly higher inflation (up to 3 percent). As Matt Yglesias explained back in March, this clarity says to Joe Schmo that "if you were at all considering investment in business equipment, structures, automobiles or the like, today would be a good day to take the plunge. Either nominal rates will stay low for a long time, or else the economy will recover unexpectedly quickly (turning your investment into a good value), or else the inflation rate will be unexpectedly high (reducing the real interest rate you pay). Either way, you want to invest today, and that should boost the economy."
It's this approach that won him plaudits from the pundits, who've called the idea nice things like "extremely bold" and, per Yglesias, a potential savior of the economy. And it's converted some of Evans's more inflation-fearful colleagues, like Minneapolis Fed chief Narayana Kocherlakota, who since coming around to Evans's idea has proposed his own version that would push the round of quantitative easing until unemployment is even lower. Most importantly, it won over Ben Bernanke, whose market-friendly new policy represents a broad shift toward fighting high unemployment, even on down to the language, referring in its announcement of the purchase of fast-paced securities purchases to the Fed's "dual mandate"—to inflation and unemployment.
So, if in the next year home prices rise, unemployment falls, and more of us feel comfortable to lend, it might have a lot less to do with the guy in the White House and more with the guy pulling the purse strings on LaSalle and Jackson.