Yesterday I posted Stephen Roach’s comment that Ben Bernanke’s credentials as an inflation-fighter might not be the most importance aspect of the job Bernanke is about to take over. (Roach is more worried about a dollar crisis). In today’s Wall Street Journal, David Wessel notes that the role of the Fed Chairman has evolved, especially under Greenspan, to include broader economic advice beyond monetary policy.
Mr. Bernanke knows his first mission is to build credibility as the chief helmsman of the U.S. economy. He’ll avoid giving Greenspan-like advice on taxes and spending for a time, and may never be as influential on so many issues as Mr. Greenspan is. But, in a political system often unable to look beyond the next election, Fed chairmen see themselves as anchors of common sense. Mr. Bernanke is likely to be no exception.
Common sense, however, requires a deep understanding of the economy. Alan Greenspan understood the changing nature of the economy – the movement as he called it to a “weightless” economy. Bernanke kind-of understands, but is a way that makes me wonder. In a speech earlier this year (while he was still with the Fed), he talked about productivity and the role of intangibles. Rather than note how the structure of the US economy was changing (as has Greenspan), he discussed how information and communications technology (ICT) has led to an increase in productivity. This seems to be an extension or variation of the standard “capital-deepening” explanation — better tools. To his credit, he does understand that the productivity gains are coming from the ICT-using sectors as well as the ICT-producing sectors (what we normally think of as “high-tech”).
When it comes to the role of intangibles, Bernanke discusses how intangibles are necessary to utilize ICT:
Some observers have characterized the new information and communications technologies as general-purpose technologies (GPTs), which means that–like earlier GPTs such as electrification and the internal combustion engine–they have the potential to revolutionize production and consumption processes in a wide variety of contexts (Bresnahan and Trajtenberg, 1995). To make effective use of a GPT within a specific firm or industry, however, managers must supplement their purchases of new equipment with investments in research and development, worker training, and organizational redesign–all examples of what economists call intangible capital. For example, to realize the benefits of its ICT investments, Walmart had to reorganize work assignments, retrain workers, develop new relationships with suppliers, and modify its management systems. Although investments in intangible capital are (for the most part) not counted as capital investment in the national income and product accounts, they appear to be quantitatively important. One recent study estimated that, by the late 1990s, investments in intangible capital by U.S. businesses were as large as investment in traditional, tangible capital (Corrado, Hulten, and Sichel, 2004).
Recognizing the importance of intangible capital has several interesting implications. First, because investment in intangible capital is typically treated as a current expense rather than as an investment, aggregate saving and investment may be significantly understated in the U.S. official statistics. Second, firms’ need to invest in intangible capital–and thus to divert resources from the production of market goods or services–helps to explain why measured output and productivity may decline initially when firms introduce new technologies. Finally, the importance of intangible investment explains to some degree why the lags between ICT investment and the resulting productivity gains can be long and variable. Because investments in high-tech capital typically require complementary investments in intangible capital for productivity gains to be realized, the benefits of high-tech investment may become visible only after a period of time.
In this discussion, Bernanke does not seem to acknowledge the role of intangibles as a driver of both innovation and productivity, unrelated to the utilization of ICT. In fact, there is one phrase from the above quote that specifically worries me: “firms’ need to invest in intangible capital–and thus to divert resources from the production of market goods or services.” This places intangibles in a secondary position, something one derivation way from actual production, rather than at the core. Investment in intangibles is like any other investment in productive capacity. Would that phrase make as much sense if it read “firms’ need to invest in machinery–and thus to divert resources from the production of market goods or services?” Only if he is referring to investment as diverting resources from current operations. But I don’t think that was what he meant.
Granted, the entire phrase acknowledges an important point: that output and productivity often initially declines with the introduction of new technology because of the learning process and the changes to the production process that may be needed to maximize the utilization of the technology (which should rightfully be considered intangibles). He also recognizes that “general purpose technologies” such as electricity change the production process. Later on he makes reference to this as well: “And if rapidly improving information and communication technologies are truly general-purpose technologies, history suggests that they will continue to stimulate new ways of producing and of organizing production.”
But, he really doesn’t follow up on that point. He did not discuss was how the nature of work itself is changing. That is the key point which Alan Greenspan understands — not just new ways of producing and organizing production of the same old products but radically new products services and production processes. If Bernanke is to play the role of the chief economic helmsman, he will need to deepen his grasp of what that economy looks like. He is close — but maybe not yet all the way there.
I realize that this is an exercise in old fashion Fed-gazing (trying to discern what might happen from a few select statements). It is grossly unfair to characterize Dr. Bernanke’s views on the basis of one speech. I’m sure we will learn more about how he sees the economy as the nomination progress.
Or, then again, we may not. This is the Fed after all, and far more powerful market players than me are dissecting his every word and action. He may learn very quickly to be extremely careful in what he says.
For all of us, it will be his actions, not so much his words, which will show whether he truly understands our economy. For all our sakes, I wish him well.