The Fed chairman emphasizes innovation and growth.
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It’s hardly an encouraging sign of a nation’s economic vitality when its most optimistic policymakers are its central bankers. They’re supposed to be the professional worriers, after all — always fretting about inflation or asset bubbles or fiscal deficits. In the U.S., however, Federal Reserve chairman Ben Bernanke looks to be the biggest bull around. In a weekend commencement speech at Bard College at Simon’s Rock, Bernanke argued against the notion that America’s good times are over for good.
Yes, there are big economic challenges, Bernanke conceded. Then he pulled back the camera: Despite the recent recession and financial crisis, the world continues to grow richer and more populous and more educated. That means millions and billions more minds generating new ideas, all of which people can exchange more easily than ever thanks to the information-technology revolution. Simultaneously, trade and globalization are increasing the payoff for being first with innovative products and processes. “In short,” Bernanke said, “both humanity’s capacity to innovate and the incentives to innovate are greater today than at any other time in history.” Possessing the biggest, most open economy on the technology frontier, America stands to benefit like no other nation.
The speech served as a gentle rejoinder to the much-discussed “new normal” stagnationist arguments put forward by economists such as Tyler Cowen and Robert Gordon. Cowen is author of The Great Stagnation, and Gordon recently published the paper “Is U.S. Economic Growth Over?” (Although Bernanke didn’t mention Cowen and Gordon by name, their works are in the speech’s footnotes on the Fed’s website.) While there is actually much overlap between what the three academics are saying — a more prosperous future is possible if we don’t fumble — Bernanke’s cheery emphasis is most welcome at a time when the U.S. is growing slowly and Europe not at all.
It’s certainly a more encouraging message than what’s coming from the rest of Washington. In President Obama’s recent budget plan, White House economists declared, “In the 21st century, real GDP growth in the United States is likely to be permanently slower” than it’s been since World War II. In the same document, Team Obama also quietly nudged up its estimate of the natural unemployment rate to 5.4 percent from 5.0 percent. (The jobless rate was less than 5 percent, by the way, for 24 straight months during the George W. Bush administration and for 50 months under Clinton.) In addition, Team Obama has been completely dismissive of any suggestion that Obamacare might be having an unintended negative impact on both the quantity and quality of job creation. And while Democrats talk about the need for faster growth, they continue to make even higher taxes the foundation of any budget deal.
As for Republicans, they’re still consumed by the notion that a debt-fueled financial crisis is just around the corner — despite low interest rates and low inflation. Consider: The share of revenue going to pay interest on federal debt is close to a record low, at about 1.4 percent. And although a downward trajectory would be preferable, the Congressional Budget Office predicts that the combination of higher revenue and Budget Control Act spending cuts should at least stabilize the federal debt-to-GDP ratio for a decade before entitlement costs really begin to bite. A party that really cared about boosting innovation-driven growth would be offering ways to offset a one-third cut (over ten years) in basic scientific, technological, and health-care research.
Amazing advances can happen even in a troubled economy. The most technologically innovative period in U.S. history was during the Great Depression, notes economist Alexander Field in A Great Leap Forward. Washington should do what it can to help America take advantage of the favorable macro factors Bernanke outlined. For instance, some House Republicans want to create a commission to recommend ways to reform the Fed, currently the only pro-growth institution in Washington. We’d be better off with a bipartisan commission to recommend ways government can effectively boost U.S. innovation and productivity. And since Bernanke is likely a short-timer at the central bank, maybe he could head the panel. After all, he seems to be just about the only person in D.C. to understand that with smart policy decisions today, the current dreary New Normal could be followed by another Long Boom.