Why Bernanke is No 'Obamacan'

In a way, Barack Obama was for Reaganomics before he was against it. By that, I mean the putative Democratic presidential nominee broadly accepted the reality that the lower taxes, lighter regulation, and freer trade of the past 25 years have more or less been a pretty good thing for America. Not perfect, but good.

At least, that was the message he gave in his book The Audacity of Hope. But the Obama who has emerged during the presidential campaign has been quite different, basically advocating a reversal of Reaganomics, and Clintonomics, too. Obamanomics 1.0 saw the value of lowering tax rates from their stratospheric levels of the 1970s and of cutting regulation and opening up trade. Obamanomics 2.0 is all about raising taxes back near the levels of the Disco Era, regulating healthcare and energy, and rethinking NAFTA.

But the transformation is hardly mystifying when you realize that the core idea at the center of today's Democratic Party is this: Not only has the economy been a disaster for the past eight years but really for the past generation—with the notable exception of the Clinton Interregnum. That's why Democrats and left-of-center economists keep harking back to the pre-Reaganomics 1970s when, supposedly, incomes were more equal. And they always trot out the erroneous statistic that middle-class incomes have been flat since the '70s. The supposed Long Boom, in their view, has really been a Long Bust.

But then along comes Federal Reserve Chairman Ben Bernanke to set the record straight. In a speech at Harvard, he pointed out that American productivity—the single best measure of economic strength—has been growing at an impressive 2 ½ percent or so since 1995. And what explains the remarkable performance of the Amazing American Growth Machine? What ended years of poor productivity growth? Was it universal pre-K? Was it nationalized healthcare? Was it billions in new government spending on basic research? Was it the corporate r&d tax credit? Was it the sort of stuff that Barack Obama says are the keys to economic growth?

Not so much. Bernanke had a much different explanation, not that he is necessarily against any of those sorts of measures or says they are completely ineffective. As he told the graduating class at Harvard:

A great deal of intellectual effort has been expended in trying to explain the recent performance and to forecast the future evolution of productivity. One key finding of that research is that, to have an economic impact, technological innovations must be translated into successful commercial applications. This country's competitive, market-based system, its flexible capital and labor markets, its tradition of entrepreneurship, and its technological strengths help ensure that that happens on an ongoing basis....It is difficult to imagine that we would have online retailing today if the transportation and telecommunications industries had not been deregulated. In addition, the lowering of trade barriers promoted productivity gains by increasing competition, expanding markets, and increasing the pace of technology transfer.

In short, the key to the Long Boom—not the Long Bust—was America deciding to reembrace free-market capitalism in the 1980s by reducing the distortions of high taxes and high regulation. (Later in the speech, he also credits the Fed's inflation-fighting prowess.) Bernanke then went on to talk about growing income inequality:

Even though average economic well-being has increased considerably over time, the degree of inequality in economic outcomes over the past three decades has increased as well. But as best we can tell, the increase in inequality probably is due to a number of factors, notably including technological change that seems to have favored higher-skilled workers more than lower-skilled ones. In addition, some economists point to increased international trade and the declining role of labor unions as other, probably lesser contributing factors.

And what should we do about rising economic inequality? Well, Bernanke had a few thoughts about that, too:

Answering this question inevitably involves difficult value judgments and tradeoffs. But approaches that inhibit the dynamism of our economy would clearly be a step in the wrong direction. To be sure, new technologies and increased international trade can lead to painful dislocations as some workers lose their jobs or see the demand for their particular skills decline. However, hindering the adoption of new technologies or inhibiting trade flows would do far more harm than good over the longer haul. In the short term, the better approach is to adopt policies that help those who are displaced by economic change. By doing so, we not only provide assistance to those who need it but help to secure public support for the economic flexibility that is essential for prosperity.

So I guess you can cross Bernanke off of Obama's short list of possible veeps. But maybe he's on John McCain's?