Last week, the Wall Street Journal used its editorial columns to question why, over the past several years, the Federal Reserve’s projections of short-term U.S. economic growth have been so consistently over-optimistic, and to ask whether it might be time to rethink our current monetary policies. “It’s heresy to say so,” the Journal wrote, “but maybe after six years of zero-interest rates, and long after the financial crisis ended, the Fed should wonder if its policies haven’t become an impediment to faster growth. Maybe letting markets begin to set interest rates again would lead to a better allocation of capital and less economic uncertainty.”
Former Fed chairman Ben Bernanke took umbrage at these comments, and he responded with a defense of the central bank’s record (along with a dry-witted jab at the Journal for its history of raising false alarms about inflation). Bernanke argued that, while post-crisis growth has been disappointingly slow, the unemployment rate is a better barometer of cyclical economic conditions, and it “has fallen more quickly than anticipated.” The Fed deserves credit for boosting U.S. job creation, he added, especially in light of the ongoing malaise in Europe and Japan.
“With short-term interest rates pinned near zero, monetary policy is not as powerful or as predictable as at other times,” Bernanke acknowledged. “But the right inference is not that we should stop using monetary policy, but rather that we should bring to bear other policy tools as well.” In particular, he would like to see a new federal infrastructure program.
Bernanke is correct that America’s recent fiscal policy has left much to be desired, and he’s probably correct that the Fed’s asset purchases contributed to lower unemployment. (I say “probably” because, as Matthew Klein of the Financial Times has explained, it’s still unclear exactly what impact the second and third rounds of quantitative easing, along with “Operation Twist,” had on the real economy. The first round of QE, which began in late 2008, clearly helped mitigate the financial crisis.) But it’s also true, as the Journal observed, that the decline in unemployment partly reflects a large decline in the labor-force-participation rate (LFPR), which was 2.9 percentage points lower in April than it was in June 2009, when the Great Recession formally ended. (The LFPR among men aged 25 to 54 hit an all-time low in October 2013, and as of April it was still 1.5 percentage points below its June 2009 level.) And there are many prominent economists — including Stephen Roach, currently of Yale and formerly of Morgan Stanley — who worry that the Fed’s post-crisis policies have increased the risk of new asset bubbles.
As for infrastructure spending, the inefficiencies of America’s public-investment process tend to make infrastructure-based stimulus less effective in reality than it looks on paper. (“Long-term costs and benefits of major infrastructure projects are devilishly difficult to measure precisely and always have been,” notes Washington Post editorialist Charles Lane.) That said, during a period of ultra-low interest rates, there is a good case for green-lighting infrastructure projects that address obvious problems.
But those projects are only one small element of the growth agenda America needs. On the revenue side, we need to shift much more of our tax burden from income to consumption. On the spending side, we need to rebalance federal outlays so that entitlements such as Medicare and Social Security don’t crowd out basic R&D, national defense, and other valuable discretionary programs. We also need to transition toward a skill-based immigration system that serves our national interest rather than the interests of various political lobbies. We need to expand apprenticeship programs so that high-school students have more pathways to middle-class prosperity. We need to get rid of needless occupational-licensing requirements that discourage work and entrepreneurship. We need to rethink land-use regulations that constrain housing supply. We need to allow greater energy development in Alaska and other states. We need to adopt innovation-friendly patent reforms. And so on.
In short: When it comes to bolstering economic growth, we need to think big.