It’s being called the “battle of the beards” — Paul Krugman vs. Ben Bernanke. Both are eminent (and bearded) economists: Bernanke, chairman of the Federal Reserve Board; Krugman, a Nobel Prize winner and a prominent New York Times columnist. Krugman accuses Bernanke of being too timid in fighting high unemployment and slow economic growth. Bernanke calls Krugman’s policy proposals “reckless.” What’s going on? 
 
 Beyond the rhetoric, there’s a serious debate about the Federal Reserve. A decade ago, the Fed was widely seen as all-knowing and powerful. It could cushion business cycles, defuse financial crises and ensure prosperity. No more. Almost everyone thinks unemployment (8.1 percent in April) is declining too slowly. By year-end 2013, it will still be somewhere between 7 and 8.1 percent, according to top Fed officials’ latest estimates. 
 
 Robert J. Samuelson writes a weekly column on economics. View Archive 
 
 The Fed hasn’t been passive. Since late 2008, it has kept overnight interest rates just above zero. During the 2008-09 financial crisis, its emergency loans to banks and money market funds averted a broader collapse. The Fed also bought more than $2.5 trillion of Treasury bonds and mortgage-related securities in an effort to lower long-term interest rates (studies suggest a decline of 0.7 percentage points or more) and boost stock prices, as investors seek higher returns. 
 
 But these heroic exertions haven’t yet ignited a robust recovery. 
 
 What we need now — and what the Fed could supply, says Krugman — is a bit more inflation. This would spur growth and job creation, he argues. The Fed now strives to keep inflation around 2 percent annually, a low level that it views as reassuring the public. Krugman wants the Fed to raise its target range to 3 to 4 percent for five years. 
 
 “You’d make borrowing more attractive. Sitting on cash would be less attractive,” he says. The logic is straightforward. If prices rise 4 percent instead of 2, consumers and businesses have an incentive to buy now and avoid higher prices later. If interest rates don’t increase (or increase less than inflation), then “real” rates — adjusted for inflation — fall; again, that makes borrowing more appealing. 
 
 Higher inflation would also erode the “real” value of debt. With a lighter debt burden, households and businesses would feel freer to spend. Another channel would be a cheaper dollar on foreign exchange markets, making U.S. exports less expensive and imports more expensive. (Krugman minimizes this channel, because he thinks Europe and Japan should also pursue higher inflation.) 
 
 Besides Krugman, some other economists advocate higher inflation. But not Bernanke. 
 
 Without naming Krugman, he responded at an April 25 news conference: “Does it make sense to actively seek a higher inflation rate in order to achieve . . . a slightly increased pace of reduction in the unemployment rate? The view [of top Fed policymakers] is that that would be very reckless.” 
 
 Bernanke argued that the belief that the Fed keeps inflation down (what economists call the “anchoring” of inflationary expectations) tends to be self-fulfilling. If companies think inflation will stay low, they refrain from large price increases that might weaken their competitiveness. This then allows the Fed to be more aggressive in cutting interest rates to fight unemployment. If inflationary expectations shifted, as they might under Krugman’s proposal, the flexibility could be lost. 
 
 Although Bernanke didn’t say so, there are other reasons Krugman’s policy could backfire. Consider: 
 
 ●Prices might increase faster than wages, reducing workers’ purchasing power and (probably) dampening spending. 
 
 ●Experiencing higher inflation, consumers might become more fearful of the future and, to protect against the unknown, might increase saving and reduce spending — the opposite of what Krugman intends. This happened in the 1970s, although at higher inflation rates than Krugman proposes. 
 
 ●Something similar could happen in financial markets. Investors — not knowing whether inflation would return to 2 percent and fearing it might go higher than 4 percent — might demand much higher interest rates to prevent erosion of their money. This, too, would undermine Krugman’s strategy. 
 
 None of this is preordained. Krugman’s theory could be right. It responds to an understandable urge to do something about the feeble recovery and the millions left without work and hope. But in this debate, I side with Bernanke. Flirting with more inflation is treacherous. If inflation expectations change, the consequences are hard to predict. The double-digit inflation in the late 1970s (peak: 13 percent) resulted from well-intended mistakes and unleashed many damaging side effects. 
 
 What we should have learned since 2008 is that the Federal Reserve can’t do everything and overambitious goals guarantee disappointment. The larger lesson is that economists have exaggerated their understanding and control of the economy. People often don’t act according to academic theories. There isn’t a proper policy response for every need. This captures our frustration. ||||| Photo Advertisement Continue reading the main story 
 
 JACKSON HOLE, Wyo. — The Federal Reserve chairman, Ben S. Bernanke, delivered a detailed and forceful argument on Friday for new steps to stimulate the economy, reinforcing earlier indications that the Fed is on the verge of action. 
 
 
 
 
 
 
 
 
 
 Calling the persistently high rate of unemployment a “grave concern,” language that several experts described as unusually strong, Mr. Bernanke made clear that a recent run of tepid rather than terrible economic data had not altered the Fed’s will to act, because the pace of growth remained too slow to reduce the number of people who lack jobs. 
 
 The federal government said on Wednesday that the economy expanded at an annual rate of 1.7 percent in the second quarter, slightly higher than its initial estimate of 1.5 percent but lackluster in normal times. A measure of consumer confidence hit a three-month high on Friday, but that, too, was impressive only in comparison with the immediate past. The government will release a preliminary estimate of August job growth next week; it is expected to show that the unemployment rate remains above 8 percent. 
 
 Mr. Bernanke said that the Fed’s efforts over the last several years had helped to hasten economic recovery, that there was a clear need for additional action and that the likely benefits of new steps to stimulate growth outweighed the potential costs. 
 
 “It is important to achieve further progress, particularly in the labor market,” Mr. Bernanke said. “Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.” 
 
 In setting the stage for action when the Fed’s policy-making committee meets in two weeks, Mr. Bernanke appeared to defy political pressure from Republicans to refrain from new measures. Mitt Romney, the Republican presidential nominee, has said such action would be counterproductive, and has pledged to replace Mr. Bernanke at the earliest opportunity. 
 
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 “Policies from Congress, not more short-term stimulus from the Fed, are the ingredients necessary for restoring growth in the American economy,” Senator Bob Corker, Republican of Tennessee, said in a statement after Mr. Bernanke’s speech. 
 
 On the other hand, Democrats welcomed Mr. Bernanke’s remarks. There is little prospect that Fed action will lift the economy before the election, but party officials fear the opposite possibility — that inaction could undermine economic confidence — and so they greeted the speech with relief. 
 
 Senator Charles E. Schumer, Democrat of New York, said Mr. Bernanke “should not let any political backlash deter him from following through and doing the right thing.” 
 
 Mr. Bernanke did not announce any new steps in his speech, delivered here before an annual monetary policy conference organized by the Federal Reserve Bank of Kansas City. Nor did he indicate which steps were most likely, a reticence that reflects his desire not to give details ahead of the Federal Open Market Committee, which convenes in two weeks. 
 
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 Some analysts expect the Fed to announce a new round of asset purchases after that meeting, further expanding its holdings of Treasury securities and mortgage-backed securities to reduce borrowing costs and spur investment. Others expect that it will instead announce its intent to keep its benchmark interest rate near zero beyond its current forecast of late 2014. 
 
 Jan Hatzius, chief United States economist at Goldman Sachs, said he was now convinced that the Fed would extend its forecast, because Mr. Bernanke described benefits but not costs of that approach. He said he also expected the Fed to announce new asset purchases, but not necessarily in September. The speech, he said, made the Fed’s intentions clear, “but it still doesn’t really tell you the timing.” 
 
 Stocks fell slightly after the release of Mr. Bernanke’s remarks, then climbed again. Commodities like gold and oil also increased. 
 
 Mr. Bernanke devoted much of his speech to asset purchases. He said past rounds of purchases had produced “economically meaningful” benefits, contributing to lower borrowing costs for corporations and a general rise in stock prices. He cited one study that found that the combined effect of the Fed’s three rounds of asset purchases raised output by 3 percent and increased employment by two million jobs. 
 
 He provided a shorter description of the benefits of policy forecasts. 
 
 In both cases, after reviewing the costs of existing actions and the potential consequences of doing more, Mr. Bernanke rendered a clear verdict on the balance. 
 
 “The costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out further use of such policies if economic conditions warrant,” he told the audience of central bankers, fiscal policy makers and academic economists gathered at the Jackson Lake Lodge in the middle of Grand Teton National Park for the annual policy conference. 
 
 The Fed has sent signals in recent months that it is preparing to take new action to stimulate the economy. Its policy-making committee said after its most recent meeting in early August that it would “provide additional accommodation as needed.” 
 
 Since that meeting, the depressed housing market has shown signs of modest revival. But worries about fiscal policy have intensified, and Europe remains on a low boil. Mr. Bernanke’s verdict on Friday was unambiguous: “The economic situation obviously is far from satisfactory,” he said. And his description of the high unemployment rate as a “grave concern” drew particular notice from his well-versed audience. 
 
 “It goes well beyond normal central bank expressions of the need to bring unemployment down,” said Alan S. Blinder, an economics professor at Princeton University and a former Fed vice chairman. “It is an interesting question for someone to research if any central banker has ever made a statement that strong” about unemployment. 
 
 In addition to asset purchases and forward guidance, the account of the most recent meeting mentioned two other options. The Fed could lower the interest rate it pays banks on reserves kept at the Fed, which might push some money into circulation. It could also seek to provide low-cost financing for certain kinds of lending, like mortgage loans, emulating a program recently begun by the Bank of England. 
 
 Several Fed officials have said they would like to replace the time horizon for current policy with a trigger tied to economic data, declaring, for example, that the Fed is likely to keep interest rates near zero until the unemployment rate falls below a specified level, or until economic output exceeds a certain threshold. 
 
 The internal debate underscored a striking contrast with Mr. Bernanke’s speech at this same conference in 2010, when he gave the first indication that the Fed would embark on a second round of asset purchases. 
 
 Then, Mr. Bernanke devoted most of his remarks to establishing the need for action, largely taking for granted that the Fed had the power to improve the economy. On Friday, it was the need for action that Mr. Bernanke took for granted. The question now is how much more the Fed can do.
– Call it the "battle of the beards," suggests Robert Samuelson of the Washington Post: Paul Krugman vs. Ben Bernanke. Both are prominent economists, both have facial hair aplenty, and each has called the other "reckless." Krugman has been lambasting the Fed for not doing enough to help the economy recover—even if it means boosting inflation. Inflation, he argues, isn't so scary. Rising prices would encourage people to buy now, not later, and it would reduce the "real" value of debt. But Bernanke has said that "would be very reckless." He observed that the Fed's inflation goals are a self-fulfilling prophesy—without them, companies would jack up prices. Samuelson sides with Ben, adding that prices could rise faster than wages, hurting spending. "None of this is preordained," Samuelson writes. "Economists have exaggerated their understanding and control of the economy. People don't often act according to academic theories." Krugman actually responded, praising Samuelson for making "a serious effort" to tackle the tough issue. He still thinks he's right, "but then, I would, wouldn't I?"