SUNDAY, NOVEMBER 14, 2010
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Wehave harpooned every whale in the ocean—and some minnows.” —Alan K. Simpson, cochairman of President Obama’s deficit commission, on the tax and spending reforms that he and Erskine Bowles put forward Wednesday.
Myths about the Fed 5 BY GREG IP T 1
he Federal Reserve’s announcement on Nov. 3 that it will buy $600 billion worth of Treasury bonds to help boost the struggling U.S. economy reverberated around the
world this past week, with condemnation from critics as varied as Sarah Palin and the president-elect of Brazil. Yet much of what the Fed and its chairman, Ben Bernanke, have done is shrouded in confusion and misperceptions.
By printingmoney, the Fed will create runaway inflation.
The Nobel Prize-winning economistMilton Friedman issued a famous dictumnearly
50 years ago: “Inflation is always and everywhere amonetary phenomenon.”His belief has become widespread over the years, to the point that evenmany non- economists assume that when the Fed printsmoney, higher prices inevitably result. But the link betweenmoney and inflation is weaker than people think. The Fed’s current policy of
“quantitative easing”essentially means it is printingmoney ($600 billion) to buy assets such as government bonds. The Fed isn’t literally printing the $20 bills that end up in your wallet—it’s doing the electronic equivalent.When it buys a $100 bond froma bank, it deposits $100 into the bank’s account at the
Fed. This electronicmoney is called reserves, and the Fed conjures it up out of thin air. However, thismoney can lead to
inflation only if banks lend it and consumers and businesses spend it. Banks lend when they have strong balance sheets and when credit- worthy customers demand loans. People and businesses spend when their incomes are growing and they’re confident about the future. None of this has been true lately. The Fed is trying to stimulate
spending, but not by showering people with newlyminted dollars. Rather, when the Fed buys bonds, it pushes their prices up and their yields down. Lower long-term interest rates will tempt some people to borrow. They will alsomake stocks more attractive.Higher stock prices willmake consumers feel wealthier and spendmore. If that spending outstrips the economy’s productive capacity, inflation could result. But
BY MEG BOSTROM
n the global-warming debate, scien- tists are, admirably, still trying to save the day. Last week, the Ameri- can Geophysical Union announced plans to mobilize about 700 climate
scientists in an effort to improve the accuracy of media coverage and public understanding of their field. Separately, a smaller group of scientists organized by John Abraham of the University of St. Thomas inMinnesota said it was putting together a “rapid response team” to bring accurate climate science to public de- bates. On the face of it, such efforts certainly
make sense. The scientists hope, not unreasonably, to bring more attention to the climate-change crisis.More crucially, they seek to halt the slide in public opinion on the issue, with recent polls finding Americans’ belief in the evidence for global warming on the decline, along with their viewof the need for immediate action to slow climate change. And it’s true that science education, when done well, may help accomplish these goals. But will it lead to meaningful policy?
Or will this latest round of efforts instead result in another spate of news stories about scary end-of-the-world scenarios, another series of debates over whether global-warming science is a hoax and more wasted time — time we don’t have? There is good reason to think that
those who are worried about climate change would make greater progress — especially among Republicans, who pro- fess increasing skepticism about warm- ing—if they focused less on arguing the scientific reality and more on building support for specific solutions that all sides can agree on. The first problem with focusing on the
science debate is that the spectacle of dueling scientists confuses people. We have already seen this story unfold in the media: Twoopposing sides, given similar exposure, argue about complexities that most Americans feel they have little ability to assess. Instead of focusing on the causes of climate change in simple terms that people can grasp and act upon, it is all too easy for scientists to get trapped in a debate with skeptics about whether they can prove that warming is real and how they can show definitively that its effects are imminent. Faced with this sparring, it becomes fairly easy for the average person to dismiss climate change as an open question and cross it off the list of things they need to worry about.
Which brings us to a related problem:
People are already overwhelmed with worries about unemployment, economic insecurity, federal debt and even terror-
that’s years away: The economy today is awash in idle factories and unemployed workers.
The Fed is endangering the global recovery by trying to drive down the dollar.
2
Since Chairman Ben Bernanke hinted in late August that the Fedmight
resume quantitative easing, the value of the dollar has fallen steadily, dropping 7 percent against the euro, 3 percent against the yen and 7 percent against the Korean won. Many foreign officials and analysts have accused the Fed of deliberately driving down the dollar to give U.S. exporters a competitive advantage abroad. The truth ismore complicated. If
the Fed had an explicit policy of devaluing the dollar, it would sell dollars on the openmarket, buying foreign currencies in return. However, the Fed does this only with the Treasury’s consent. The Fed hasn’t sold dollars since 2000. But while a weaker dollar isn’t the
direct goal of the Fed’s actions, it’s a predictable and welcome consequence.When the Fed eases monetary policy—either by lowering short-termrates or, nowadays, by forcing down long- termrates with bond purchases—it makes Treasury bills and bonds less appealing. Investors flock to alternatives, including foreign stocks and bonds, driving up other currencies relative to the dollar. The lower dollar complements lower interest rates in spurring economic growth. This is a zero-sumgame. As a
falling dollar boosts American exports, it hurts the exports of our trading partners. But that’s as it should be. After years of living beyond itsmeans, the United States must now savemore and consume less. Thatmeans its trade deficit has to shrink. Countries such as China that piled up huge surpluses with the United Statesmust do the opposite. It’s also a risky strategy. The surge
of investment in foreign assets could produce dangerous bubbles. Speculators could drive commodity prices so high that consumers could be hammered worldwide.Worse,
countries unhappy about a flood of imports could turn to protectionist policies.
The Fed is trying to finance the government’s profligacy.
3
By buying Treasury debt, the Fed is in effect financing the federal deficit. This raises
alarms:Hyperinflation in countries such as Zimbabwe orWeimar Germany occurred when private investors wouldn’t lend to the government, so the government printedmoney to finance its spending. But that’s not what’s happening
here. Even with our budget deficit as a share of GDP near a post-World War II record, there’s no shortage of private and foreign investors to buy Treasury bonds. It will be time to worry, though, if
the Fed keeps buying bonds in the face of rising inflationary pressure simply to keep the federal government’s borrowing costs down. At present, the economy is so weak and inflation so low, itmight actually help if the government borrowed more. But that’s not going to happen. Political gridlockmakes an additional federal stimulus pretty unlikely, and Fed officials don’t want to be seen as servants of the Treasury.
The Fed is immune to politics.
but presidents and Congress have ample ways to pressure it. They can privately and publicly browbeat the chairman, withhold his reappointment, appoint compliant governors or amend the Federal Reserve Act. Like Bill Clinton and GeorgeW.
4
Bush before him, President Obama has respected the Fed’s independence. Yet Bernankemust still walk a political tightrope.He has long wanted to set an explicit inflation target (probably 2 percent per year) but hasn’t done so, partly because of opposition fromsome in Congress who worry that focusing on such a target would come at the expense of job creation. The radical
If only it were so. The Fed is technically independent from the rest of the government,
steps Bernanke took during the crisis to prop up the financial system angeredmany lawmakers; the chairmanmay be reluctant to ramp up quantitative easing for fear of further inflaming those critics. Obama reappointed Bernanke last
year and has been solidly behind the Fed. But for how long? The time will come when Bernankemust tighten monetary policy. Chances are, it will be sooner than Obama wants.Will the president’s support be as unwavering then?
Bernanke knows what he’s doing.
5
Bernanke came to his job with an impressive resume, including years of studying
the Great Depression. To that he can now add the irreplaceable experience of running the central bank through one of itsmost harrowing periods. If anyone should know what he’s doing, it’s him. Unfortunately, the Federal
Reserve’s history is littered with mistakes, fromthose that led to the Great Depression in the 1930s to those that brought on stagflation in the 1970s. The Fed is themost powerful financial regulator in the United States and employs hundreds of economists, supervisors and lawyers, yet it had almost no idea how vulnerable the financial system had become to a collapse in housing prices. It would be nice if we could isolate
these errors to ensure that they never happen again. But the global economy is complicated and always changing, and the Fed can never be certain of the consequences of its actions.Has it now gone too far, fueling reckless speculation, inflation and global trade tensions? Or has it not gone far enough, inviting stagnation and deflation? No one knows for sure—Bernanke included.
Greg Ip is the U.S. economics editor at the Economist and the author of “The Little Book of Economics: How the EconomyWorks in the RealWorld.”
6Want to challenge everything you think you know? Visit the “FiveMyths” archive at
washingtonpost.com/fivemyths
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A climate plan for climate-change deniers I
ism. We should not expect them to start worrying about whether the Earth is warmer, glaciers are melting, or floods and droughts will become more com- mon. A global warming crisis simply can’t compete with the long list of crises average Americans already face. Finally, the global warming debate increasingly turns more on political be- lief thanonscientific fact.Until relatively recently, environmental issues were largely nonpartisan. Republican presi- dentssuchas RichardNixonhave histori- cally achieved significant environmental gains, and voters across party lines used to express fairly equal levels of support for environmental protections. But while some environmental priori-
ties continue to be shared across the political spectrum, global warming is not one of them. Surveys show a sharp and increasing political divide on a range of beliefs involving climate change, with tea party conservatives voicing the greatest skepticism.Mention “global warming” in a room full of average Americans, as I have done on several occasions, and you will find that they quickly align with one camp or the other. The idea that global warming is a hoax is no longer a fringe perception but a part of the Republican Party brand. Even if climate scientists manage to
convince some conservative skeptics that global warming poses an urgent threat, Republican leaders have backed them- selves into a corner. The issue has be- come so politically polarizing that it would be nearly impossible for them to retreat from their stance and to get behind legislation that is thought to concern global warming. I’mnot suggesting that we halt efforts
to educate the public about warming.For all sorts of reasons, such initiatives are critical. But we must stop thinking that these efforts are a necessary precondi- tion for getting anything done on this issue.
S ANDRÉ DA LOBA FOR THE WASHINGTON POST
What’s a conservative who secretly cares about climate change to do?
o what’s a conservative politician who secretly cares about climate change todo?HowcanRepublicans,
in Congress or in legislatures around the country,make the case to their colleagues — and how can they bring conservative voters along? They must start by focusing on cli-
mate-friendly policiesandstop assuming that we must first achieve unanimity on global warming science. People can sup- port the transition to a carbon-free ener- gy future without believing, or even knowing, that it might influence glaciers, coral reefs or Arctic ice. There is a long list of carbon-reduction measures that strong majorities of Re- publicans, Democrats and independents firmly support, includingmandating bet- ter fuel efficiency, increasing federal
funding for clean-energy research, spending more for mass transit, raising efficiency standards for homes and other buildings, and requiring utilities to pro- duce more energy from renewable sourc- es.They evensupport limitsonemissions of carbon dioxide and other greenhouse gases — just as long as they are seen as anti-pollution measures, not “caps.” For instance, an October poll by the
Pew Research Center for the People and the Press found that 73 percent of Repub- licans favor requiring better fuel efficien- cy for cars, trucks and SUVs; 64 percent want more federal funding for research on wind, solar and hydrogen technology; and 55 percent favor spending more on public transportation. Pewpolls over the summer, meanwhile, found that 74 per- cent of Republicans favor requiring utili- ties to produce more energy from renew- able sources, while 57 percent back limits on carbon and other greenhouse gas emissions. Even as avowed a climate-change de-
nier as Sen. James Inhofe (R-Okla.) is open to considering action on black carbon (more commonly known as soot), thought to be the second-largest contrib- utor to global warming after carbon dioxide.As he told the Guardian last year, his interest in black carbon stems from concern about poor families in Africa who suffer lung disease as a result of cooking with wood stoves. “I am sur- prised that anyone would be at all sur- prised that I would be trying to find out about black carbon while I don’t buy the idea that anthropogenic gases are caus- ing global warming,” he said. In focus groups conducted bymy firm
on behalf of numerous environmental organizations over the years, climate skeptics almost always tell us that such steps are good things to support, even if global warming isn’t real. New energy approaches are good for the planet, for human health, for energy independence and for our economy, they say. The current political and economic
terrain isn’t fertile ground for cap-and- trade or for other comprehensive legisla- tion to address global warming, but that doesn’t mean we can’t make progress on the many solutions that people agree on across party lines.Solet’s setabold target for the clean-energy production we will need in 10 or 20 years and start demand- ing a plan that will achieve it. The wary, the unconvinced and the
downright skeptical don’t have to be a barrier tochange.Theymightevenjoinin.
Meg Bostrom is co-founder of the Topos Partnership, a communications strategy firm. Together with the Social Capital Project, Topos researched and authored the 2009 report “Climate Crossroads: A Research- Based Framing Guide.”
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