“Joe Gagnon for Fed Chair,” writes Brad DeLong. What’s he talking about? An ambitious plan by Peterson Institute economist and former Federal Reserve staffer Joe Gagnon to use monetary policy to restore developed GDP and employment levels to something decent.

The Economist has an able summary:

[B]uy an additional $2 trillion in government bonds, with an average maturity of 7 years. That would be in addition to the $1.75 trillion of Treasury and mortgage-related debt it has already almost finished buying.

Mr Gagnon, extrapolating from the reaction to the current purchase programme, estimates the additional $2 trillion would lower Treasury yields about 0.75 percentage points. That, he reckons, would lower private borrowing rates, boost stock prices 13%, and lower the dollar by 5%. The combined stimulative impact would equal a 1.75 percentage point cut in the federal funds rate, and lift GDP by 3% after two years.

There would be no effect on the dollar if other central banks also ease monetary policy further, as Mr Gagnon advises. Specifically, he calls on the European Central Bank to lower its refinancing rate to 0.5% from 1%, purchase 1 trillion of long term securities, and continue offering unlimited 12-month funding to banks. The Bank of Japan should set an inflation target of 1% (inflation is currently -2.2%), purchase an additional 100 trillion of securities, and commit to buying a similar amount if core inflation over the next 12 months remains negative. The Bank of England should buy an additional £200 billion worth of long-term bonds or the equivalent of foreign currency bonds, hedged with currency swaps.

These are big, scary numbers. But the economic indicators from the developed world are also big and scary, especially when you look at the situation facing the majority of the population that doesn’t have a bachelor’s degree. The fact that the kind of people likely to be personal friends with policymakers and pundits have been in okay shape since the stock market stopped tanking seems to be obscuring from a lot of people the basic reality that a dramatic situation calls for dramatic action.

Noam Scheiber has an excellent post about how Ben Bernanke’s determination to oppose change to the status quo is undermining any effort to actually preserve the Fed’s ability to set monetary policy without short-term interference from members of congress:

In his testimony, Bernanke suggested that the two proposals [from Chris Dodd and Ron Paul] were similar in spirit, in that both threaten the Fed’s autonomy. Paul’s audit idea would expose the Fed’s interest-rate setting to “short-term political pressure,” he brooded; reforming the regional bank boards would replace a “Main Street perspective” with a “Washington perspective.” In fact, the two proposals couldn’t be more different in this regard. The Paul idea really would undermine the Fed’s mission. After all, the whole reason for an independent central bank is that fighting inflation is painful in the short-run, but beneficial in the long-run. On the other hand, politicians are chronically bad at making short-term sacrifices for long-term payoffs. Allowing Congress to second-guess interest-rate decisions would be self-defeating.

By contrast, Dodd’s board-member idea would enhance the Fed’s independence. As it stands, the president of the New York Fed gets hired and fired by a board constructed by the very same mega-banks he regulates. If there’s an arrangement more likely to stifle aggressive regulation, I’m hard-pressed to think of it. (Under the circumstances, it’s remarkable that several recent New York Fed presidents were as effective as they’ve been.)

Which is why it was so disappointing to watch Bernanke dig in on this issue. The Paul amendment has a real chance of passing Congress. If Bernanke wants to stop it, he needs to come off as someone genuinely concerned about the Fed’s independence–which I believe he is–rather than as a chairman who reflexively opposes any change to the status quo. But to do that, he needs to honestly acknowledge the merits of Dodd’s board-reform proposal, and I saw no evidence of that on Thursday. However justified it may have seemed from the inside, it was a disservice to the institution he runs.

I’m not sure I understand where these conventions come from about when you are and aren’t allowed to question the good faith of powerful Washington figures. Scheiber has a sound argument here that Bernanke is behaving more like a reflexive opponent of change to the status quo than like someone with a well-honed concern for creating appropriate institutional arrangements. That seems like a pretty good reason to make it our working hypothesis that he is in fact more of a reflexive opponent of change to the status quo than like someone with a well-honed concern for creating appropriate institutional arrangements.

You would expect a Bush administration economic policy appointee to be interested in reducing government spending, in creating a business-friendly regulatory environment, and in securing the interests of prosperous asset owners rather than poor unemployed people. And Bernanke is a Bush administration economic policy appointee, and those appear to be the things he’s interested in.

I think some folks are too quick to pronounce David Obey’s “war tax” dead in light of Nancy Pelosi’s dismissal of the idea.

As you see with, for example, the success centrist Democrats have had at whittling down and perhaps killing the public option the success of an idea on the Hill has only a loose relationship to its extent of support. The vast majority of members of congress either oppose everything about health care reform, or else support a pretty robust public option. But a relatively small number of Democrats have been able, by indicating a willingness to support health reform without a public option but unwillingness to support health reform with a public option, to make the whole debate revolve around them.

So the question of the war tax is not so much a question of how many Democrats join Obey in supporting one, but whether left-wing members of congress organize around the principle of “no war funds without a war tax.” A big enough bloc would force the leadership to pass a war funding bill with mostly Republican votes. That, in turn, would give the GOP leadership leverage to make demands of their own. The the White House and the congressional leadership would need to pick their poison—the war tax, or whatever the Republicans dream up. One appeal of this strategy is that there’s a clear desire among progressive activists to put in place some form of Progressive Block strategy in which left-wing members all get together and make a credible demand to spike something unless the leadership bends to their will. It’s a good idea, but the major legislative controversies thus far—stimulus, health care, cap-and-trade—haven’t been well-suited to it. It’s not credible that liberals would sink any of those initiatives over some flaws. By contrast, it would be very credible for liberal members of congress to threaten to vote “no” on war appropriations unless their demands are met.

Of course this raises the question of whether the war tax is the best demand to make. In CAP’s statement on Afghanistan our proposal is that the war should be paid for not through a new tax, but through “specific offsets within the defense department’s baseline budget to fund the war.” I think that’s a better idea—constraining the overall size of the Pentagon behemoth rather than dragooning even more funds into defense.