Ben Bernanke's misplaced faith in innovation
The head of the US Federal Reserve thinks our capacity to move forward will continue to boost global wealth, but that way lie booms and busts
Ben Bernanke, chairman of the United States Federal Reserve, is an optimist about economic growth in the coming decades, rejecting "depressing" views about a slowdown and putting 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.
The American strategist Ed Yardini of Yardini Research writes in his blog: "In the past, Bernanke 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."
And indeed, Greenspan entered his 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.
While Bernanke is no Greenspan-style booster of the stock market, we have more than a decade of reasons for caution. 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 US household to obtain. Technology seems to have become better at efficiency than job creation, at least for those with modest skills, while 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 labour which the poor possess in abundance.
To be sure, for hundreds of years it has been wrong to bet against human innovation. Very likely it will continue 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.