Opinion

James Saft

Bernanke’s dangerous optimism: James Saft

May 21, 2013

May 21 (Reuters) – Federal Reserve Chairman Ben Bernanke is
an optimist about economic growth in the coming decades,
rejecting “depressing” views about a slowdown to put his faith
in collaborative innovation driven by a jackpot culture for
inventors.

For his mental health, let’s hope he believes it.

For our economic wellbeing, let’s hope he doesn’t act on it.

While a series of economic revolutions has driven a 30-fold
increase in living standards between 1700 and 1970, economists
have recently fretted that the information technology changes of
recent years will yield less growth.

Bernanke, speaking last weekend to graduates at Bard College
at Simon’s Rock, in Massachusetts, was having nothing of it. Not
only will humans continue to innovate and to find ways to wring
value out of recent innovations, the rise of the Internet allows
for massive and rapid collaboration, he argued. And, as Mark
Zuckerberg can tell you, the potential rewards for innovation
exceed those in the past.

“Both humanity’s capacity to innovate and the incentives to
innovate are greater today than at any other time in history,”
Bernanke said.

While Bernanke was careful to couch his views as being about
the long-run future, this kind of thinking, while perhaps
appropriate to graduation day, is a tad scary when done by the
man with his hands on the levers of monetary policy.

Hazy faith in a future of explosive growth from as yet
undreamt-of technologies is exactly the kind of thing which in
the past has led us to stock market bubbles, busts and
recrimination.

“In the past, Bernanke explicitly stated that his ultra-easy
monetary policy is aimed at driving stock prices higher. Now
that they are at record highs, his recent cheerleading could
contribute to a melt-up, just as Alan Greenspan did during the
second half of the 1990s. We all know how that ended,”
strategist Ed Yardini of Yardini Research writes in his blog. ()

And indeed, Alan Greenspan entered his late, late, rococo
period of central banking with his own touching faith in
technology, opining in 2000, just as the tech bubble was about
to burst, that there was a virtuous cycle between technological
advances, the economy, the efficient use of capital and the
wealth effect of a booming stock market. If only, Alan, if only.

It all seems a long time ago, and while Bernanke is no
Greenspan-style booster of the stock market, we have more than a
decade of reasons for caution.

4’33″

And really, those who downplay the effects of technology on
the economy and argue that indoor plumbing and the internal
combustion engine represent the low-hanging and high-value fruit
now plucked are not taking the large view.

After all, someone 20 years ago who wanted to listen to
composer John Cage’s 4 minutes and 33 seconds of a pianist
sitting in silence in front of a keyboard had to troop down to
the nearest avant garde music store; whereas today a click of a
button, an instant transfer of money and the recorded silence is
yours via iTunes.

What could be more efficient? Take that, Mr Ford and the
Brothers Wright!

The other difficulty, unstated and unexplored, in Bernanke’s
millennial faith in innovation is the ways in which it may raise
problems for one or both of his mandates: full employment and
price stability.

The depressing thing about the technological revolution is
that it has coincided with a period in which both income growth
and meaningful employment have been increasingly difficult for
the average U.S. household to obtain. Technology seems to have
become rather better at efficiency than job creation, at least
for those with modest skills. At the same time, in helping to
drive down prices it has set the stage for overly loose monetary
policy leading to destructive booms and busts.

Equally depressing is the way in which income inequality has
only grown, arguably helped along by monetary policy which tends
to inflate the value of those things owned by the rich
without increasing, by much, the value of the unused labor which
the poor possess in abundance.

To be sure, for hundreds of years it has been wrong to bet
against human innovation. It has, and very likely will,
continued to advance and yield benefits.

The worry is that Bernanke, as he appears to be doing with
quantitative easing, takes that mindset and applies it to the
world of money and finance, where, on the evidence, innovation
benefits practitioners at the expense of the rest of us.

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