Sunday, July 2, 2017

Ben Bernanke Tells Central Bankers That Economic Growth Is Not Enough

Ben Bernanke, the former chairman of the US Federal Reserve, delivered a speech at a conference of European central bankers in Sintra.  The focus of his speech was on the US but it also has implications for Europe.  He began is speech with a review of economic conditions in the US.  He stated that despite the cyclical upswing in the US,  many Americans are dissatisfied with the economy.  He explained why they were dissatisfied  and he turned his attention to the longer term issues that we face so that Americans can cope with the economic disruptions that accompany economic growth.

Bernanke cited four major reasons for the dissatisfaction that has led to the rise of populism and the election of Donald Trump in the US:

The first reason is easy to understand but harder to explain.  Real median income for males in the US today are lower than they were 38 years ago in 1979.  Economic growth over that period has not led to rising wages for the median male worker.

Rising income inequality, which is indicated by the lack of growth in median real income, has also been accompanied by lower economic and social mobility.  This contrasts dramatically with the social mobility that Americans experienced between the end of the second world war and 1979.  90% of Americans born in 1940 earned more than their parents by 1980.  Only 50% of Americans born in 1980 earn more than their parents do today.  Income and wealth inequality is higher in American than it is in most other developed nations.  Many Americans can tolerate income inequality but not when it is accompanied by falling social mobility.  Equality of opportunity is an important value that has been lost along with rising economic outcomes.

The rise in populism in the US has often been explained by the "death from despair" that we have seen within the white working class.  Death from drugs, alcoholism, and suicide exceed deaths from auto accidents and firearms combined in the white working class.  However, the problem is even broader than that among the white working class.  The labor force participation rate among prime aged Americans between the ages of 25-54 was 97% in 1960.  Today it is only 88%.  This has been accompanied by breakdowns in the structure of many families.  Children and the elderly are not supported by their families as they were when almost everyone was in the labor force.

The economic issues faced by too many Americans have led to a distrust of government.  Only 20% of Americans agree that the government will do what's right or almost right most of the time.  That is explained to some extent by economic policies under Reagan, Clinton and George Bush.  Taxes have been cut primarily for the wealthy and government support for social welfare programs has eroded over this period.  The US economy grew much faster between 1945 and 1970.  That period of unusual growth was also accompanied by a rise in government programs that enabled economic growth.  We are now in period of more normal economic growth during which public welfare programs such as education are no longer supported as they were during the faster economic growth period.

Bernanke then turns to what's missing today.  We need programs that will help individuals and localities adjust to slower economic growth and the rapid economic changes that have been underway for many years.  Donald Trump exploited the economic issues that led to the rise in populism but the populist promises he made during his campaign have fallen by the wayside.  Instead his administration is leaning towards the traditional supply side orthodoxies long favored by the Republican Party.  The implication is that they are a part of the problem and not part of the solution.

Bernanke concludes by stating that we live in a world of imperfect capital markets and public goods markets.  There is no guarantee that our political response to the resulting problems will be optimal or equitable.  Tax and transfer policies might be helpful but they have to be done right.  They will be resisted if they look like handouts to people.  That usually leads to resentments which some politicians exploit.  Bernanke does not offer any easy solutions because the problems we face are built into our system.  The problems are serious but difficult to rectify.  Central bankers have done what they can by keeping interest rates low but fiscal policies will also be required to deal with our problems.  There is much slack in many of our economies even with zero interest rates.  He mentions some of the structural problems in many of our inflexible labor markets but he warns us that they need to forward looking as well as backwards looking.  Forward looking programs must accompany government efforts to increase the flexibility of the labor force.

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