IT HAS BEEN a good week in Washington for the meritocratic principle. The withdrawal yesterday of Harriet Miers’s nomination for the Supreme Court brought to an end a squalid episode in which President Bush had sought to place an underqualified, grinning sycophant at the pinnacle of the nation’s judicial system.
On Monday we got a new Chairman of the Federal Reserve. It may not be mentioned in the Constitution, but the Fed is on a par with the Supreme Court in its importance in the lives of Americans, with the added significance that, as custodian of the value of the US dollar and the $11 trillion economy it lubricates, its decisions affect billions of people beyond America’s shores. It is not an exaggeration to say that the whole world had a stake in Mr Bush’s deliberations.
The Miers nomination was so awful that it had produced a certain amount of gallows humour among anxious economic policy watchers in Washington as we waited to hear whom Mr Bush would choose for the Fed. Would his candidate to succeed Alan Greenspan be, perhaps, Hiram J. Windbag III, an old savings bank manager buddy from the President’s hard-drinking, deep-drilling days in west Texas? Or maybe Mr Bush would take the opportunity to elevate his high school economics teacher to run America ’s monetary policy and preserve the value of the world’s reserve currency? In the event, the man picked by the President to lead the Fed is to Harriet Miers what William Shakespeare is to William McGonagall.
Ben Bernanke is not exactly a household name. But this sometime professor of economics at Princeton and Stanford, one of the most important thinkers on monetary policy in the world, and a policymaker at the Fed for three crucial years, will soon enough become one of the biggest influences on the livelihoods of people everywhere on the planet. And we should all be grateful, because there are few tasks more important than looking after the US money supply, and there are few people as well equipped for the task as Mr Bernanke.
We take price stability for granted now. Indeed, except perhaps when we fill up the petrol tank, prices have been so steady for so long that we don’t even notice them. Although official indicators of inflation still show prices edging up, these data have an upward bias that masks what has been, essentially, immobility in prices for years. The price you paid for your last shirt or blouse was probably no higher than what you paid for it a decade ago.
But the crushing of the great inflation of the 1960s and 1970s has been a painful, tumultuous process that seemed unachievable 25 years ago. Serious economists used to debate whether we might have to get used to a world in which inflation could be contained to “only” 6 to 7 per cent a year.
The debasement of the world’s currencies 30 years ago had its roots in the explosion of US government spending and the subsequent collapse of the postwar Bretton Woods system of monetary management. It impoverished billions, reapportioned wealth and income from the thrifty to the spendthrift, led to the misallocation of trillions of dollars of investment, bankrupted companies and individuals, and toppled governments. It is not too strong to say that it sapped the very spirit of the great industrialised democracies. And its reversal in the past quarter of a century has paved the way for the unparalleled prosperity that much of the world enjoys today. This crushing victory was helped by the decline in trade union power; the shift to sensible fiscal policies; the freeing up of financial markets, and the globalisation of goods, capital and even labour.
But in the end nothing matters as much as the decisions of the central bank. Any potentially inflationary event can have inflationary consequences only if the central bank lets it. The key is taming inflationary expectations, preventing any price shock from becoming embedded in consumer and market psychology.
Periodically, in the past 20 years, the tidewaters of inflation have risen dangerously high up the world economy’s flood walls. In 1993, for example, as America recovered from a short recession, growth accelerated and prices took off too. Under Mr Greenspan the Fed moved quickly to snuff out the risk — doubling short-term interest rates in just over a year and setting the US on course for almost a decade of sustained, non-inflationary growth.
Now, just as Mr Bernanke takes over, there are signs that inflation is lapping again at the feet of the world’s economic policymakers. In the year to September consumer prices in the US rose by more than 4 per cent, the fastest rate in 25 years; wholesale prices have been rising even more rapidly. The culprit, of course, has been energy prices; when the price of oil doubles it spills over immediately into higher costs for everybody. But the lesson of the last half century is that oil prices on their own cannot produce runaway inflation. Only if the Fed fails to prevent the price increases from infecting the rest of the economy can inflation take hold.
Few economists have articulated the centrality of the central bank as well as Mr Bernanke. His work has emphasised its responsibility not only to prevent inflation, but also its opposite — depression. The biggest threat now is probably the fading of bad memories. The farther we get away from the era of catastrophic inflation, the harder it becomes to see the peril.
To counter this, we should, I think, all be forced to watch news footage of the 1970s, with images of Shirley Williams and the department of prices and consumer protection in Britain, or Jimmy Carter in America urging businesses to hold down prices, and remember that only a really good central banker stands between us and a rerun of that horror movie. The good news is that Mr Bernanke is that man.
