I associate Ben Bernanke with several major contributions:

1. The theory of irreversible investment, circa 1983.  Before Bernanke, Dixit, and Pindyck, models often assumed that investments could be reversed or "taken back."  Bernanke outlined how the irreversibility of investment might matter.  Often individuals will choose to wait and sample more information, rather than make an immediate decision.  Small changes in information could lead to big fluctuations in investment.  Large changes in interest rates might have little effect.  Bad news can hurt you more than good news helps you.  This was Bernanke’s first major contribution to economics.

2. The credit channel for monetary policy; here are the papers, most of all the 1992 piece with Alan Blinder.  Bernanke took an old Keynesian idea and gave it empirical rigor.  During upturns and downturns, does money or credit play the leading role?  Bernanke showed that credit has greater importance.  Bernanke’s work in particular helped combat the Litterman and Weiss paper of 1983; L&W had showed that once you put the nominal interest rate in a Vector Autoregression (a relatively atheoretical statistic technique), money didn’t seem to matter.  Bernanke rescued the relevance of money but showed it mattered through the associated channel of credit.  This work stands among the most important contributions in macroeconomics in the last twenty years.  It also suggests that Bernanke, as Fed chair, will look closely at credit indicators.  Here is a Bernanke speech on money and the stock market.

3. Inflation targeting. Very few if any economists will now defend the old Friedmanesque recipe of monetary targeting or a fixed rule for money supply growth.  It has become increasingly popular to look toward inflation targeting.  New Zealand and Canada led the way in terms of policy when their central banks explicitly adopted a range for inflation targeting; 0-2 percent in the case of New Zealand.  Bernanke would like to see the Fed put greater emphasis on price stability.  He did not invent this view, but he is the individual who made it politically credible.  Right now the major debate in the theory of monetary policy concerns whether inflation targeting should be tight or loose.  Bernanke has been a major force on these issues, and he has often been praised for his leadership in this area, even by those who disagree with him.  Here is a 1999 Bernanke essay on inflation targeting.

4. Causes of the Great Depression; here is one paper, here is part of his book.  Bernanke did a good deal of comparative work and concluded that the Great Depression became great because of deflation, its international transmission, and rigid exchange rate policies.  Recall that Sweden, which cut the link from gold and let its currency float, had a much milder depression during the 1930s.  This has become part of accepted wisdom; in a policy context it implies Bernanke has a low tolerance for deflation.  Here is a Bernanke speech on the Great Depression.  Here is an Anna Schwartz review of his book.

5. The global savings glut.  Trade and budget deficits are enormous, so why aren’t we collapsing?  Why do real interest rates remain so low?  Bernanke cited the possibility of a global savings glut; here is one explanation of the idea, here is another.  The bottom line is this: some Asian countries have high levels of savings, but poor financial institutions.  They invest their savings in the United States, and often we invest in back in Asia.  In essence they are "outsourcing" their savings to foreign financial institutions.  This recycling of Asian savings may help explain what is going on in the global economy.  It also suggests that the current U.S. position is at least temporarily sustainable.  Here is a relevant Bernanke speech; here is some commentary on the idea.

Here is Bernanke’s vita.  Here are his books.  Here is his talk on making the transition from academic life to the policy world.  Here is a White House bio.  Here is Wikipedia.

Bernanke the man? I met him once and had lunch.  He came across as a nice guy; most importantly, he listened to everyone at the table (or at least seemed to!), no matter what their academic status.  In the profession he is popular.

If you know more, comments are open.  Here are various blogger reactions.

The new Fed nominee is Ben Bernanke, an excellent choice and a first-rate economist. 

What must a good Fed chair do? 

1. He should have a mastery of data and an understanding of the macroeconomy.  He must not be a dogmatist.  Bernanke gets an A or A+ here.

2. He should have the ability to lobby the President and Congress for support.  It is not clear who is listening but Bernanke gets in relative terms at least a B+ here.

3. He should have the personality to hang tough.  This requires the "test of time" but we have no reason to be pessimistic.

4. He should recognize that the Fed can only succeed if fiscal policy is responsible.  Give him an A.

5. He should be credible abroad and on Wall Street.  Bernanke is not fully senior in this regard, at least not within the policy community, but he could achieve this stature within a year’s time.  B.

6. He should have that Greenspan magic touch.  Grade?????

Next I will post on Bernanke’s contributions to economics.  Comments are open…

Word is that a successor to Alan Greenspan — or at least the Bush nominee — will be announced later today.  Check back for a report.  Comments on this post are open in case you beat me to the news; I do have a lunch coming up, plus many of you are excellent analysts anyway…

Milton Friedman has long suggested that the social responsibility of business is to maximize profits.  Recently he tried to clarify this view:

I shall try to explain why my statement that “the social responsibility of business [is] to increase its profits”…

Note first that I refer to social responsibility, not financial, or accounting, or legal. It is social precisely to allow for the constituencies to which Mackey refers. Maximizing profits is an end from the private point of view; it is a means from the social point of view. A system based on private property and free markets is a sophisticated means of enabling people to cooperate in their economic activities without compulsion; it enables separated knowledge to assure that each resource is used for its most valued use, and is combined with other resources in the most efficient way.

Of course, this is abstract and idealized. The world is not ideal. There are all sorts of deviations from the perfect market–many, if not most, I suspect, due to government interventions. But with all its defects, the current largely free-market, private-property world seems to me vastly preferable to a world in which a large fraction of resources is used and distributed by 501c(3)s and their corporate counterparts.

Friedman has qualified his social responsibility claim for force and fraud, but what about negative externalities more generally (just ponder Tamiflu licensing if you want the appropriate headache)?  Is Friedman’s claim:

1. Profit maximization is the best rule available, even though it fails society in particular instances (in that case, isn’t there some slightly more convoluted rule that can cover at least some of these situations and modify the outcomes?  If only "very simple" rules are allowed, why?)

2. Businesses have no responsibility to behave in an act utilitarian fashion.  Rules are rules, and we should follow them, come what may.

3. Following the doctrine of fiduciary responsibility — in this case to shareholders — is the greatest social good in these situations.  It outweighs potential act utilitarian considerations pointing in other directions.

4. Force and fraud aside, profit maximization always coincides with the social good, at least in the absence of bad government interventions.

5. It is a public choice argument.  The claim is a noble lie, for otherwise business will be regulated by government in a counterproductive manner.

6. So much anti-corporate nonsense has been written, so we need to shock people with an extreme claim in the opposite direction.

In response to Friedman, John Mackey, the CEO of Whole Foods, argues: “I believe the entrepreneurs, not the current investors in a company’s stock, have the right and responsibility to define the purpose of the company.” 

My take: No simple rule can sum up what is right to do, for a business or otherwise.  So I have to read Friedman as falling back on #5 and #6, with his partial belief in #4 convincing him he needn’t worry about the complications so much.

Forget about avian flu, I hate waiting in line to board a plane.  But what is the answer?

United Airlines says it believes it has hit on a better solution. It recently announced a logistics ploy it calls Wilma – shorthand for window-middle-aisle – that it claims will cut boarding times by four to five minutes, an eternity in the industry’s on-time takeoff sweepstakes. The idea is to fill the window seats in economy class first, then the middle seats, then the aisle seats, thereby eliminating the free-for-all chaos that clogs the cabin when passengers are sent in by row numbers.

Southwest, of course, eliminates the whole idea of assigned seats.  Or how about some economics?  Charge people for each carry-on, since the bag makes it harder to board (and get off) quickly.  Or have an electronic record of when people manage to reach their seats and buckle their seatbelt.  The sooner you buckle, relative to your position in the plane of course, the greater your chance of a prize or rebate.  Small ideas for a much better world, as they say.

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