Bernanke Nomination Brings Out Media’s Economic Concerns
Newspapers list housing bubble, deficits, inflation confronting next Fed chairman – but issues aren’t as dire as they suggest.

By R. Warren Anderson
Free Market Project
Oct. 25, 2005

     Media coverage of Ben Bernanke, nominated to head the Federal Reserve, has been mostly positive and focused on his credentials. However, some outlets have used the nomination to exaggerate economic issues and even to take political swipes at President George Bush’s nominee to the Supreme Court.

     On the front page of its October 25 business section, The Washington Post listed a housing bubble, among rising prices, and the trade balance as challenges that Bernanke will inherit if confirmed. Likewise, The New York Times on the same day stated that “if energy prices and broad inflation both do fall next year, the housing market and the federal budget deficit could be the next items confronting Mr. Bernanke.” Yet, Fed Chairman Alan Greenspan has downplayed concerns of a national “housing bubble,” noting that real estate is a localized market. That means it’s not a liquid stock market that could come crashing down. And as for the federal deficit, the Free Market Project has reported that the media tend to work from the assumption that deficits are inherently bad – which isn’t true.

     USA Today on October 25 also summed up the over-hyped issues: “The next Fed chairman will quickly face a number of difficult issues, including growing inflation and high energy prices, the forecast slowdown of the red-hot housing market, and historically large trade and budget deficits.”

     Though the media turned their attention to those issues, the economic facts don’t give cause for such great concern:

• Inflation: Current inflation is not as big a problem as stated. Alan Reynolds of the Cato Institute explained in an October 25 post that “There is no evidence that energy price spikes have ever led to higher non-energy inflation.” Reynolds pointed out that a vigorously growing economy does not necessarily lead to inflation. Other economists have noted that global competition keeps prices relatively low and stable.

• Energy prices: While energy prices are high compared to a year ago, gasoline and crude oil prices are falling. Gas prices as of October 25 are only a penny higher than the day Hurricane Katrina struck.

• Housing: Fed Chairman Alan Greenspan has said he did not believe in a national housing bubble, only “froth” in local markets. The downturn of the housing market has been predicted since June of 2002 and has yet to occur. Writing in The Wall Street Journal on May 31, Brian Wesbury said that between 1992 and 2003, average housing prices have increased 43.5 percent, with the Consumer Price Index increasing 27.2 percent over the same period. That means that housing prices have only increased 1.5 percent faster than overall prices. Wesbury called this “a sign of strong demand and rising commodity prices, but hardly a bubble.”

• Deficits: While federal deficits are high, the federal deficit as a percentage of gross domestic product was 3.6 percent in 2004 – lower in percentage terms than nine of the last 40 years, according to the Congressional Budget Office.

• Trade balance: Trade deficits aren’t necessarily a bad thing. Cato’s Dan Griswold wrote on February 25 that “analysis of economic data from the last quarter century shows that a growing current account deficit (as a percentage of gross domestic product) is associated with faster, not slower, economic growth, as well as rising manufacturing output and falling unemployment.”

     The Times, the Post and NBC News also used the opportunity to undermine the latest Bush nominee to the Supreme Court by slipping in mentions of “cronyism.” The Times compared Bernanke to the new chief justice, John Roberts, “a candidate with sterling academic credentials and little or no taint of cronyism, and a sphinx on significant political issues.” NBC “Nightly News” on October 24 called Bernanke the “anti-Harriet Miers.” And the Post quoted former White House officials as saying that President Bush picked Bernanke because he had “unassailable credentials and enough distance from the White House to blunt charges of cronyism or ideological motivations.”