Sunday, July 9, 2017

Ben Bernanke, in Denial? "When Growth is Not Enough"

"When Growth is Not Enough" is the title of a recent Ben Bernanke speech in Portugal. I found it via the NYT article on the "Robocalypse", which contained this bizarre quote from Ben S. Bernanke "as recent political developments have brought home, growth is not always enough."

However, as you can see, something terrible has happened to US GDP growth, which is now more than 20% below its long-run trend, even if it has escaped the attention of our former Fed Chair. On twitter, Kocherlakota and I were both hoping he'd been taken out of context. Unfortunately, that turned out not to be the case. 

In his speech, Bernanke is trying to make sense of how his tenure at the Fed was followed by a populist political rebellion. To his credit, early in the essay, he does admit that the "recovery was slower than we would have liked", but in the round, as the title of his speech suggests, he is a glass-is-half-full kind of guy on the economy "the [Fed] is close to meeting its ... goals of maximum employment and price stability... more than 16 million ... jobs have been created... the latest reading on unemployment, 4.3 percent, is the lowest since 2001." He then writes "So why, despite these positives, are Americans so dissatisfied?" He lists four reasons:
  1. Slow median income growth, especially for male workers. Hourly wages for males have declined since 1979.
  2. Declining rates of intergenerational mobility
  3. Social dysfunction in economically marginalized groups (see Case-Deaton on mortality increases for working-class Americans).
  4. Political alienation.
What were the causes of these? Bernanke pushes the Gordon thesis that wartime technologies led to the boom in the early post-war period. He notes that productivity growth has been slow the past 10 years.  He correctly notes that there was a China shock (which is good, would be nice if he also mentioned exchange rates), and also argues that globalization has led to the rise in inequality. In terms of policy, he argues that more could have been done to secure the safety net and help the downtrodden.

There is much to like in the essay, and I'm not opposed to his policy prescriptions. I also agree that inequality could be part of the problem. But that there were several things that struck me.

First, Bernanke also doesn't buy the Reagan/Thatcher revolution as the cause of the growth of inequality in the US and UK. He seems to think some combination of globalization/SBTC is the cause. At least he is in good company -- Krugman, Avent, DeLong, and David Autor -- all people I respect and have learned a lot from, also don't seem to buy it. I have no idea why. 

In my own research with Lester Lusher (see here and here), we concluded that trade almost certainly was not a major cause of the rise of inequality in the US. The aggregate timing just wasn't quite right, inequality increased just as much in sectors not directly affected by trade, and other countries that trade a lot (Germany, Sweden, Japan) did not see anything like the increase in inequality in the US or UK. And when inequality finally did increase in these countries, it followed cuts in top marginal tax rates just like it did in the US and UK.

Second, reading between the lines, Bernanke seems to have caved a bit in his debate with Summers on the source of Secular Stagnation. Now he seems to be closer to the view that there was some autonomous decline in technological growth. I'm very skeptical of this view, although I'll concede it's hard to prove either way.

The big one, of course, is that Bernanke does appear to be in a bit of denial that GDP growth really has slowed. He credits the Fed for price stability, without noting that the Fed has undershot its own stated inflation target for nearly a decade now. He also doesn't mention how/why both he and the ECB raised interest rates in 2010 (no, that isn't a typo). Why shouldn't tight money in a recession lead to slow growth? Of course, it would be nearly impossible for anyone to view such a horrible thing such as the election of Donald Trump, which likely was caused in part by a weak economy (the economy always matters for elections), and realize that one's own policies were at fault. 

Unfortunately, in recent months, the US has gotten more bad news on the GDP front. Is the problem that we've already invented everything worth inventing, and growth will just naturally slow, as Robert Gordon suggests? Or is the Robocalypse upon us, as some would have us believe? Or is it that the Fed ended QE prematurely and then raised interest rates four times in a row despite inflation at 1.5%? 

I'm going to go with the latter. After all, if GDP growth and inflation are both below target, and the Fed tightens monetary policy, tell me what is supposed to happen?


  1. Yes. We po' because we no longer tax thos'ats got the money.

  2. The confidence fairies are supposed to show up and leave a quarter under your pillow.

    1. LOl. That's roughly what Kevin Warsh believed. If the Fed did too much stimulus in a severe recession, markets would lose confidence in the Fed. Begs the question, why wouldn't they lose confidence if the Fed did too little stimulus?


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