Yesterday, Slate's Matt Yglesias tweeted,
"If Bernanke ended the recession tomorrow, it would be an admission that he could have ended it two years ago. So he won't."
Let's break it down, KPC style:
1. Matt, the recession is over. The NBER dates the business cycle and puts the end of the recession as June 2009! Matt is not the only one doing this, but it is misleading and quite incorrect to do so.
2. For argument's sake, let's replace "ended the recession" with "accelerated growth". Then the conditional statement would be true. If BB could instantly accelerate growth tomorrow, he also could have done it two years ago.
3. Consider all the things BB has done to try and accelerate growth. Short term rates at zero. Promising to keep short term rates at zero for years (until late 2014). Pumping reserves into the system at an historically unprecedented rate. Two rounds of quantitative easing.
4. Matt doesn't say how BB could accelerate growth tomorrow (he only had 140 characters). I assume Matt means that BB could make a policy announcement that would instantly change everything. Something like a retroactive commitment to an nominal GDP path or a retroactive commitment to a price level path. If that's not what Matt means, then I apologize and withdraw what follows below.
5. The key for policies like that to work, even in theory, is that BB must, in Paul Krugman's words, "credibly promise to be irresponsible" and I see no way for the Fed to do so in general, let alone in this political environment. It's a lot harder than it might seem (to get an idea of how hard, check out Svensson's "foolproof way" paper).
6. I too am unhappy with the current state of the US economy. Growth is too slow and unemployment is too high. But it simply is not in the power of any single person in the world to change that in a day. Implying that BB is deliberately keeping the US economy down does not serve any constructive purpose.