The debate over Knut the polar bear's life: A metaphor for the Fed's decisions : The Indicator from Planet Money When Knut the polar bear was rejected by his mother at the Berlin Zoo, a debate caught fire over whether it was more humane to keep him alive or euthanize him. Today, as the Fed raises interest rates again, another polar bear is in danger: The economy.

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Killing the economic polar bear

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SYLVIE DOUGLIS, BYLINE: NPR.

(SOUNDBITE OF DROP ELECTRIC SONG, "WAKING UP TO THE FIRE")

DARIAN WOODS, HOST:

In 2006, Knut the polar bear was born in Berlin Zoo. Knut was rejected by his mother. He then needed 24-hour care and bottle-feeding to survive. Another zookeeper argued that this wasn't humane. The polar bear had an autoimmune disorder, and it would feel like its mother was abandoning it each time the zookeeper left. He said that Knut should be euthanized.

(SOUNDBITE OF CHILDREN CHANTING)

UNIDENTIFIED CHILDREN: (Non-English language spoken).

WAILIN WONG, HOST:

Children protested at the zoo. A media storm ensued, and the Berlin Zoo vowed to keep Knut alive. Knut was spared and was a popular attraction although he did die in an accident four years later. And look, there's a real point about economics to be made here.

WOODS: There is. So two economists at the investment company BlackRock are calling for a similar, loud public debate over whether to keep another baby polar bear alive. The baby polar bear in this metaphor is the economy.

WONG: These economists say that all over the world, central bankers are facing a brutal dilemma as they make decisions about interest rates. Do they keep the economy booming but risk inflation spiraling higher and higher? Or do they snuff out inflation now and suffocate the economy, too? In other words, do they kill the polar bear? This is THE INDICATOR FROM PLANET MONEY. I'm Wailin Wong.

WOODS: And I'm Darian Woods. Today, as the Fed lifts interest rates by three-quarters of a percentage point, it looks like that baby polar bear is at grave risk. Millions of people could be out of work if interest rates keep rising. So we ask, where's the debate?

(SOUNDBITE OF TIM HARVEST AND ZACH ROWAN'S "SNEAKING AROUND THE ZOO")

WOODS: Ever since late last year, the Fed has been dogged about signaling to everyone that its top priority is to bring inflation down, pretty much to do whatever it takes. Here's Fed Chair Jerome Powell today.

JEROME POWELL: My colleagues and I are strongly committed to bringing inflation back down to our 2% goal. We have both the tools we need and the resolve that it will take to restore price stability on behalf of American families and businesses.

WONG: But two economists at the investment company BlackRock are saying, hold on a minute. This is a serious situation. By bringing inflation down as fast as possible, you risk plunging the economy into a deep recession.

ALEX BRAZIER: Right now, lots of central bankers are sounding very tough on inflation, and that may be the right thing to do. But actually, this is such a difficult trade-off that it deserves a much wider debate, we think.

WOODS: Alex Brazier is the deputy head of the BlackRock Investment Institute. He also used to work at the Bank of England. And with his co-author Jean Boivin, he used the metaphor of Knut the polar bear to describe a situation where he thinks that not enough people are arguing in defense of saving the polar bear's life. In other words, there's not enough of a debate over how quickly to raise interest rates.

BRAZIER: What was very striking to us is that there had been more debate about Knut the polar bear than actually there is about how central banks should deal with the brutal trade-off that they are facing.

WONG: First, the argument in favor of killing the bear - inflation is terrible for an economy. It makes people on fixed incomes poorer, and it makes it really hard for businesses and people to know how to invest because everything's so uncertain. Also, when inflation is high, it gets into people's psyches. And central bankers worry a lot about this.

BRAZIER: If inflation becomes embedded, they'll need to slam the brakes even harder in future. And that's what they're worried about. They're worried that if they let this inflation persist for long, they will be presented with a bigger challenge down the road.

WOODS: It'll become a self-fulfilling prophecy.

BRAZIER: Exactly. And so what they're worried about - they're sort of saying, well, therefore, we need to do whatever it takes, whatever it takes to get inflation down quickly to avoid that risk.

WOODS: But Alex says central bankers, like Jerome Powell, are underplaying just how much pain there will be, like polar bear life-threatening levels of pain. And that's because there is another cause of the inflation today. You might have guessed it. It's the pandemic.

BRAZIER: We shifted the composition of our spending away from services and towards goods, reversing 18 years of change in the opposite direction. So that sudden structural change in what we want has effectively stranded a large amount of the service sector capacity in the economy. And you see the goods sector creating all the kind of noise and smell and heat and inflation.

WONG: Another reason - employers can't hire as easily as they used to. For one thing, there is a mismatch between what employers want and the skills that out-of-work people have.

BRAZIER: Labor force participation has declined. Effectively, people lost their jobs in the pandemic shutdown and didn't come back. And for all those reasons, the economy's less able to produce the things that it demanded than it was.

WOODS: So if production constraints are driving inflation, the Fed raising interest rates only deals with the symptom of the disease: high inflation. It doesn't deal with the disease itself: pandemic changes to the economy.

BRAZIER: To get inflation down to 2% any time soon would require the Federal Reserve to put 3 million people out of work, to reduce GDP by 2%. You know, it's a recession on the scale of the early '80s, early '90s. There's no good choice.

WONG: Millions of people might have to be laid off, effectively a very costly insurance policy against the risk that inflation might get further out of hand. Plus, slowing down the economy does nothing to help the structural problems we're facing during the pandemic like training more airline pilots or recruiting more teachers. In fact, higher interest rates probably slows those things down.

WOODS: Alex isn't saying don't try to bring down inflation at all, but he questions how fast the Fed says it's aiming to bring down inflation.

BRAZIER: Maybe there's a middle way that says, OK, get it done reasonably quickly with a minimum kind of force recession, but maybe not as quickly as you really could do if you really went for it. Now, I don't know the right answer here, but it seems to me there's a whole range there, none of which are perfect, some of which have real costs today, some of which run risks for the future. But until central banks kind of own up to this trade-off, which they haven't fully - you look at the Fed's forecasts as they stand right now; they suggest that they can have growth and inflation come down, which, you know, sort of...

WOODS: That will be great if we could have both.

BRAZIER: Yeah, I might get fit tomorrow as well.

WOODS: (Laughter).

BRAZIER: But, you know, that's an - it's an unlikely event.

WONG: I am also very unlikely to get fit tomorrow. And let's not forget, the Fed has what's known as a dual mandate. It has the goal to keep prices stable and to keep jobs high. But right now, Jerome Powell is sending the message that keeping prices stable is his biggest concern.

WOODS: One possible reason why Jerome Powell is saying that he is so steadfast in bringing down inflation is that he doesn't want history to remember him like former Fed Chair Arthur Burns in the 1970s. Inflation rose to 15% under Arthur Burns, who made a speech after his tenure called "The Anguish Of Central Banking."

BRAZIER: History is not kind to Arthur Burns. And most central bankers would dread the thought that they go down in history as the second Arthur Burns. What they would much prefer is to go down in history as the second Paul Volcker.

WONG: As Fed chair, Paul Volcker knew that he needed to create a sort of circuit breaker against expectations of higher and higher inflation. So despite the pain caused by triggering two recessions in the early '80s, he stuck to his plan and crushed inflation. After his tenure, he titled his speech "The Triumph Of Central Banking."

BRAZIER: It speaks to the incentives that central banks have now. Do you want to be associated with what was perceived as the triumph? Or do you want to be associated with what was perceived as the original sin?

WONG: Alex thinks we're probably not in the same situation Paul Volcker was in the 1980s where inflation expectations had gotten way out of hand.

WOODS: So could we be on the path towards killing this baby polar bear for no reason?

BRAZIER: Very possibly. And that's why we need a debate about whether that's right. We had a big debate about saving a polar bear's life.

WOODS: There were children with banners at the front of Berlin Zoo. Yeah, we need something similar.

BRAZIER: Well, now it's not children. It's a few ex-central bankers holding up placards next to the central bank.

WOODS: It would be harder to convince an 8-year-old to go to the central bank with a banner.

BRAZIER: Probably, yes. Yes.

WOODS: Alex Brazier, thanks so much for joining the show. It's been a real pleasure.

BRAZIER: Thanks very much.

(SOUNDBITE OF JOHN BROOKLYN'S "BLUE WAVE")

WONG: This episode was produced by Corey Bridges with engineering from Maggie Luthar. Kathryn Yang checked the facts. Viet Le's our senior producer. And Kate Concannon edits the show. THE INDICATOR is a production of NPR.

(SOUNDBITE OF JOHN BROOKLYN'S "BLUE WAVE")

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