In a recent article in the Asian Times, Hossein Askari and Noureddine Krichene, who I can only assume pass for economists, talk about the effects of interest rates on unemployment. They propose the existence of the "Volcker-Bernanke puzzle", which I will leave to them to describe. . .
"Assuming Fed chairman Ben Bernanke succeeds in reverting the US economy to full employment and rapid growth, then economic historians will be facing a difficult puzzle that could be coined the Volcker-Bernanke puzzle. Paul Volcker, Fed chairman from August 1979 to August 1987, got the US economy out of 11-12% unemployment by pushing money market rates to 19%. Bernanke pushed unemployment from 4% to 10% through aggressive monetary policy with near-zero interest rates, massive monetary injection, and buying all toxic bank loans; however, Bernanke, if he does succeed by his indicated path, will have pulled the US out of 10% unemployment by even more monetary stimulation."
Well, that certainly is a conundrum! But wait a minute. . . isn't that first assumption a little presumptuous?
"Somehow, either extreme, very tight or very loose monetary, could be followed by policymakers to solve the unemployment problem and propel the economy back to prosperity. It makes no difference which extreme is adopted!"
Amazing! No matter what we do, the economy will recover! Of course that doesn't explain how we got into trouble in the first place.
Maybe our problem was that after the fall of Volcker and before the rise of Bernanke, our interest rates were too moderate. They should have been either much higher or much lower! Now who was the guy in charge of setting interest rates back then?
I'm still not getting the puzzle though. On one hand, raising interest rates ultimately resulted in lower unemployment. On the other, lowering interest rates "pushed unemployment from 4% to 10%".
I still don't see a problem. One method produces lower unemployment, and the other produces high unemployment. Logically, you simply choose the method which produces the desired outcome. Given all the Ph.D. economists working on this, we can only assume that that indeed is what is happening.
So what is the puzzle? Our favourite economists again . . .
"Assuming Fed chairman Ben Bernanke succeeds in reverting the US economy to full employment and rapid growth, then economic historians will be facing a difficult puzzle that could be coined the Volcker-Bernanke puzzle."
Well always assuming that of course. We might also add . . .
Assuming leprechauns exist, Obama's new economic plan wherein Federal agents are to be tasked with chasing rainbows in order to seize pots of gold at their ends will balance the Budget by 2012 at the latest.
It's hard to know on what basis this assumption is being made (the Askari-Krichene assumption, that is*). I hereby formally name this assumption after them with the sincere hope that it leads to their lasting fame.
Formally the Askari-Krichene assumption goes as follows:
"Assuming Fed chairman Ben Bernanke succeeds in reverting the US economy to full employment and rapid growth (which is precisely the opposite of what we are empirically observing), then economic historians will be facing a difficult puzzle that could be coined the Volcker-Bernanke puzzle."
We could add to their fame by creating an entire genre of logical statements that could be referred to as Askari-Krichene logical positions as follows . . .
If A is observed, then assume not A.
Which can be reduced to the Askari-Krichne Rule of Inference for Keynesian Economics:
If A then not A.
*The assumption about leprechauns follows from careful empirical observations.
"Assuming Fed chairman Ben Bernanke succeeds in reverting the US economy to full employment and rapid growth, then economic historians will be facing a difficult puzzle that could be coined the Volcker-Bernanke puzzle. Paul Volcker, Fed chairman from August 1979 to August 1987, got the US economy out of 11-12% unemployment by pushing money market rates to 19%. Bernanke pushed unemployment from 4% to 10% through aggressive monetary policy with near-zero interest rates, massive monetary injection, and buying all toxic bank loans; however, Bernanke, if he does succeed by his indicated path, will have pulled the US out of 10% unemployment by even more monetary stimulation."
Well, that certainly is a conundrum! But wait a minute. . . isn't that first assumption a little presumptuous?
"Somehow, either extreme, very tight or very loose monetary, could be followed by policymakers to solve the unemployment problem and propel the economy back to prosperity. It makes no difference which extreme is adopted!"
Amazing! No matter what we do, the economy will recover! Of course that doesn't explain how we got into trouble in the first place.
Maybe our problem was that after the fall of Volcker and before the rise of Bernanke, our interest rates were too moderate. They should have been either much higher or much lower! Now who was the guy in charge of setting interest rates back then?
I'm still not getting the puzzle though. On one hand, raising interest rates ultimately resulted in lower unemployment. On the other, lowering interest rates "pushed unemployment from 4% to 10%".
I still don't see a problem. One method produces lower unemployment, and the other produces high unemployment. Logically, you simply choose the method which produces the desired outcome. Given all the Ph.D. economists working on this, we can only assume that that indeed is what is happening.
So what is the puzzle? Our favourite economists again . . .
"Assuming Fed chairman Ben Bernanke succeeds in reverting the US economy to full employment and rapid growth, then economic historians will be facing a difficult puzzle that could be coined the Volcker-Bernanke puzzle."
Well always assuming that of course. We might also add . . .
Assuming leprechauns exist, Obama's new economic plan wherein Federal agents are to be tasked with chasing rainbows in order to seize pots of gold at their ends will balance the Budget by 2012 at the latest.
It's hard to know on what basis this assumption is being made (the Askari-Krichene assumption, that is*). I hereby formally name this assumption after them with the sincere hope that it leads to their lasting fame.
Formally the Askari-Krichene assumption goes as follows:
"Assuming Fed chairman Ben Bernanke succeeds in reverting the US economy to full employment and rapid growth (which is precisely the opposite of what we are empirically observing), then economic historians will be facing a difficult puzzle that could be coined the Volcker-Bernanke puzzle."
We could add to their fame by creating an entire genre of logical statements that could be referred to as Askari-Krichene logical positions as follows . . .
If A is observed, then assume not A.
Which can be reduced to the Askari-Krichne Rule of Inference for Keynesian Economics:
If A then not A.
*The assumption about leprechauns follows from careful empirical observations.
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