While all the attention is focused on the President, a new economic leader is quietly slipping into his new seat. Yesterday morning, Ben Bernanke was sworn in as the Chairman of the Board of Governors of the Federal Reserve System. The New York Times' David Leonhardt has outlined How Bernanke Could Outshine Greenspan:
[Greenspan] rose above his job because he became a symbol of a remade American economy. He promoted a new flexibility, led by entrepreneurs and technological change, that is the envy of Japan and Europe.
To put it another way, he was a singular force in telling us that the unsettling changes of the last couple of decades -- especially globalization -- really were making us better off. In his office hung an 1819 treatise by David Ricardo, the British economist who came up with the classic argument in favor of trade: When England specializes in cloth and Portugal in wine, they end up better off than if each tries to make everything.
Mr. Greenspan made a similar case, again and again, and his prestige helped create a bipartisan consensus for opening American borders. The North American Free Trade Agreement passed in 1993 with support from both parties and was signed by a Democrat, Bill Clinton. Your shoes, your sofa, your cellphone and your car are all less expensive because of global trade.
But as Mr. Greenspan exits, these benefits are not the main thing on people's minds. The costs of the changes are. When we start buying lower-priced goods from abroad, it often means American jobs are lost. When we embrace new technology, these productivity gains also often come at the expense of someone's job.
If Mr. Greenspan had one blind spot, it was that he never really figured out how to talk about those costs. Instead, like most economists, he called for a better-educated work force and repeated the idea that the long-term gains from trade easily outweigh the short-term costs. While that is undoubtedly true, it is not exactly a persuasive argument to unemployed workers for whom the "short term" encompasses the rest of their lives.
In recent years, even the elite consensus in favor of freer trade has begun to break down. Around the world, trade talks are largely stalled. Few Democrats in Congress are willing to vote for trade deals these days. After N. Gregory Mankiw, an adviser to President Bush, suggested in 2004 that outsourcing of jobs was good for the economy, some Republicans called for his head.
Many of us are torn. By a wide margin, Americans still say trade is good for the economy, but a solid and growing majority also wants restrictions to protect domestic industries.
This is where Mr. Bernanke comes in. What the country is missing right now is a public figure who can bridge this gap, somebody who can point out that no nation has lifted living standards by shutting its borders but who can also talk eloquently about the downsides of open trade. And who might even help come up with some solutions.
Almost two years ago, as a member of the Fed's board, Mr. Bernanke traveled to North Carolina, home to many people whose jobs had moved overseas. There, he gave a speech that began with the standard argument for trade, complete with a mention of Ricardo. He finished, though, with words that are hard to imagine coming from Mr. Greenspan. Laid-off workers need help, Mr. Bernanke said.
"Reducing the burdens borne by displaced workers is the right and fair thing to do," Mr. Bernanke said. "If workers are less fearful of change, less pressure will be exerted on politicians to erect trade barriers or to take other actions that would reduce the flexibility and dynamism of the U.S. economy."
He did not take a position on specific ideas, but he mentioned a few possibilities. Laws could be changed so that pensions and health care did not disappear when a job did. Wage insurance could make up some of the difference between a lost job and a new one. The insurance benefits would be low enough that people still had incentive to find new work, but high enough to soften the blow.
In the weeks leading to today's handover, some experts — including, quietly, some inside the Fed — have urged Mr. Bernanke to have smaller ambitions than Mr. Greenspan did. Don't talk about big ideas, they say; stay focused on interest rates.
So I put the question to Mr. Mankiw, the last high-profile economist to get himself in trouble by talking about trade. I began the conversation by pointing out the obvious, that selling people on trade is hard. Mr. Mankiw laughed.
"I learned that the hard way," he said.
So should Mr. Bernanke stick to platitudes?
Absolutely not, Mr. Mankiw said. "Having a smart economist like Greenspan or Bernanke in a position where people will listen to him is too valuable," he said. "Bernanke comes from a background of being a teacher and a textbook writer. He may prove to be very good at boiling things down to their essence. He may prove to be a fantastic communicator."
So speak up, Mr. Chairman.
I agree that the Chairman should speak up. But he needs to come up with better answers than what we have before us. Here is the conclusion of Mr. Bernanke's speech, on Trade and Jobs--March 30, 2004:
What can be done to help workers who lose their jobs because of competition from imports? Attempts to restrict trade through the imposition of tariffs, quotas, or other trade barriers are not a good solution. Such actions may temporarily slow job loss in affected industries. But they do so by imposing on the overall economy costs that typically are many times greater than the benefits. In the short run, the costs of trade barriers include higher prices for consumers and higher costs (and thus reduced competitiveness) for U.S. firms. Trade barriers typically provoke retaliation from trading partners as well, with potentially large costs for exporters. And history shows that in the longer run, economic isolationism and retreat from international competition lead to bloated, inefficient industries, lower productivity, and lower living standards.
The better policy approach is two-pronged. First, at the macro level, policy should be directed at helping to ensure that jobs become available for those who have been displaced. In particular, over time, appropriate monetary policies can help the economy achieve maximum employment with low inflation, irrespective of the trade situation. The nation's trade policies, rather than attempting to restrict trade, should be used to push for even more trade. By opening markets abroad, trade policy provides greater opportunities for U.S. firms and workers.
The second piece of a constructive policy toward trade is to help displaced workers train for and find new work. Some steps in this direction have been taken. Currently, the government's principal program for helping workers displaced by trade is the Trade Adjustment Assistance program, or TAA. The Congress has recently extended the TAA through 2007, while adding a special TAA program for older workers and a separate TAA program for farmers. The TAA program offers up to two and a half years of job training, allowances for job search and relocation, and income support for eligible workers, the latter for up to 104 weeks after the initial 26 weeks of conventional unemployment insurance benefits have been exhausted. The recently passed legislation also provides for health insurance assistance for some eligible workers. The U.S. Department of Labor certified about 208,000 workers for trade adjustment assistance during fiscal year 2003, spending $551 million on the program. Finally, although current TAA legislation is generally interpreted to apply only to jobs displaced in manufacturing, bills to extend TAA to service-sector workers were introduced this month in both the House and Senate.
TAA is certainly not a perfect program. A recent report by the General Accounting Office (2001) described the challenges of effectively retraining older, less-educated workers. It noted also that TAA does not address all the problems of communities that have suffered from plant closings and the like. More general criticisms can be raised about the program: First, in a complex and interdependent economy, identifying workers affected by trade is not always a straightforward matter. Second, one may well wonder why workers displaced by trade should be assisted but not workers displaced by other factors, such as restructuring or automation.
Lately, a number of proposals have been advanced to help displaced workers more generally, including changes in law that increase the portability of pension and health benefits. Other proposals include a program of "wage insurance," which would help to cushion the wage loss that often occurs when job losers take new jobs (Kletzer and Litan, 2001) and tax credits for firms that invest in worker training (Mann, 2003, 2004). Time does not permit me to evaluate these and other alternative proposals today. Instead I will conclude by noting that helping displaced workers is good policy for at least three reasons. First, reducing the burdens borne by displaced workers is the right and fair thing to do. Second, helping workers who have lost jobs find new productive work is good for the economy as well as for the affected workers and their families. Finally, if workers are less fearful of change, less pressure will be exerted on politicians to erect trade barriers or to take other actions that would reduce the flexibility and dynamism of the U.S. economy. In the long run, avoiding economic isolationism and maintaining economic dynamism will pay big dividends for everybody.
I agree - don't restrict the flexibility and dynamism of the US economy. But we also need to take steps to foster that dynamism and deal with its consequences. The suggestions of maintain open markets and increase re-training come across as just more of the same-old same-old.
In an era where the competitive advantage in manufacturing costs has already shifted against the US and where competitive advantage in innovation and technology is slowly draining away, where are the jobs that these workers are to be trained for? Health care? How many more health care workers can we absorb? Computer programmers? How may laid-off autoworkers are going to become Java programmers, especially when bright young engineers in India and China can do the same work for a fraction of the cost?
Unfortunately, there is a real danger that the job profile in the I-Cubed Economy is beginning to look like a dumb-bell: growth in high-level, higher paying jobs and growth of lower-level, lower paying jobs. The middle is what is in danger of getting squeezed. For those workers, re-training is no answer. Few will be re-trained for the higher level jobs; most will be re-trained for the lower level jobs. Some will drop out of the workforce altogether.
That is why there is a higher level of anxiety.
What is needed is a clear discussion of how the dynamism of the American economy is going to create middle-class jobs in the future. Some of the programs need to foster dynamism and job creation were mentioned in the State of the Union (see earlier posting). But a lot was left out.
What about a simple program that was in the PACE-Finance legislation (which the President apparently didn't pick up on): a tax credit for training incumbent workers. It is much better to help workers stay competitive and keep their current jobs than to train them for something else. Yes, we will have to continue to help workers switch jobs. But the current system only kicks in once you are out on the street. This is akin to our health-care system for the poor -- wait until you are really, really sick and go to the emergency room. Not a way to lower anxiety.
To his credit, Mr. Bernanke did mention some of the additional ideas on job training. But until he starts taking about the rest of the competitiveness agenda, it will still come across as nothing more than platitudes - unfortunately.
So, Mr. Chairman - do speak up. But speak up with some new ideas. We've heard all the old ones too many times before.
