Businessweek Article About The U.S. Economy 2012

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In a recent article in Newsweek Ben Bernanke is talking about how the U.S. economy may need further stimulus money. Link to the full article here

Federal Reserve Chairman Ben S. Bernanke is betting the new U.S. economy is the same as the old one as he lays out arguments for more stimulus to revive it.

He made that diagnosis last week in a rebuttal to those who blame an 8.3 percent unemployment rate on structural shifts in the economy wrought by the financial crisis and who contend joblessness is permanently elevated.

“I see little evidence of substantial structural change in recent years,” Bernanke told fellow central bankers and economists at the annual monetary-policy symposium in Jackson Hole, Wyoming. “Following every previous U.S. recession since World War II, the unemployment rate has returned close to its pre-recession level.”

The message for investors is Bernanke believes what he calls the “grave concern” of 12.8 million Americans out of work can be tackled by a stronger economic recovery, driven by monetary support if necessary. The view that the country’s woes are cyclical was a keen subject of debate in the shadow of the Teton mountains, dividing Bernanke’s fellow central bankers, Wall Street economists and academics.

Tight Credit
Bernanke and his supporters argue that the sluggish recovery and lingering unemployment are more the result of temporary headwinds, such as tight credit conditions and housing-market weakness, and can be cured with monetary aid. His critics blame structural changes, such as a mismatch between job openings and skills. They say further easing will help little and may even do harm by fanning inflation.

“In an environment where the actual unemployment rate is not coming down, at least not quickly, I think there’s still room for monetary policy to do more,” said Goldman Sachs Chief Economist Hatzius, whose estimate of the so-called natural rate of unemployment that triggers inflation is just below the 6 percent calculation of Fed researchers. “My view of this is pretty similar to the Fed’s.”

“That is why after three-plus years of zero-based interest rates and $2 trillion of the Fed’s balance-sheet expansion, the economy is only growing at 2 percent,” he said. “Cyclical weakness is more easily rectified with quantitative easing remedies than structural weaknesses, which rest more logically in the hands of fiscal policy makers.”

Just what is ailing the U.S. economy formed part of Bernanke’s case for greater Fed intervention that may come as soon as the next meeting of policy makers on Sept. 12-13. The 58-year-old former Princeton University economist and Great Depression scholar used his Jackson Hole address to lament the suffering caused by unemployment, and his defense of unorthodox policies such as bond-buying signaled he may deploy them again.

Costs of Policies
“The costs of non-traditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant,” Bernanke said. “Over the past five years, the Federal Reserve has acted to support economic growth and foster job creation, and it is important to achieve further progress, particularly in the labor market.”

Bernanke’s challenge may be highlighted Sept. 7, when economists surveyed by Bloomberg News predict Labor Department data will show unemployment exceeded 8 percent for a 43rd straight month in August as payrolls grew by 125,000, slowing from July’s 163,000 gain.

At the same time as some of his colleagues question his faith in monetary policy’s power, they also push back against his labor-market analysis. St. Louis Fed President James Bullard told the conference “it sure looks like the economy was on one trend pre-crisis and is on a very different trend post-crisis.”

“It’s quite unhelpful to equate structural and permanent factors,” the Richmond Fed’s Lacker said during the same discussion. The gap will eventually close as “people are working on training programs” to address the mismatch in skills.

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