Partisan divide over economic outlook worries Ben Bernanke

Former US Federal Reserve Chairman Ben Bernanke in 2009.
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Ben Bernanke is worried.

The former chairman of the Federal Reserve, who can offer his thoughts freely now that he is three years out of office, is not anxious about the objective, actual state of the economy. Rather, he is worried that Democrats and Republicans view the health of our nation completely differently.

To Democrats, things look dour indeed. To Republicans, things are rosy and looking better all the time.

"There is this kind of partisan coloring," Mr. Bernanke told me last week in a rare interview while on a trip to Manhattan from Washington, where he lives.

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"It is really striking," he said. "The election result completely reversed people's views of the state of the economy. Republicans who thought that we were in a dystopia now think things look great, and Democrats, the opposite. And it shows that it isn't all based on an objective assessment of the economy."

Mr. Bernanke's assessment is supported by recent research: A series of new surveys and polls show direct evidence that your politics increasingly define your view of the economy.

Just this month, the University of Michigan's monthly survey of consumer sentiment diverged in an unprecedented way: Republicans are convinced that the economy is surging, while Democrats are concerned about an imminent recession.

To Mr. Bernanke, when the economy — as well as the basic statistics that undergird it — becomes politicized, the result is bad policy.

"A lot of the emotion is not really susceptible to nuanced policy arguments," he said, shaking his head.

Mr. Bernanke has been thinking recently about the current state of politics and the economy. Although he left the Federal Reserve in 2014 ("It's a lot more relaxing to be in the civilian world," he said), he recently had to a write an afterword for the paperback version of his book "The Courage to Act," which is expected to come out in two weeks and chronicled his time at the Fed and captured his thinking during the financial crisis.

That exercise forced him to try to think through the implications of economic policy in an age of populism. And while wages may be stagnant for many, and some industries are shedding jobs, Mr. Bernanke is convinced that much of the country hasn't appreciated just how good the economy is.

"The U.S. has done so much better than most of the rest of the world," he said. "I mean if you have an international perspective and you travel around the world, then you hear from policy makers or average people in other countries: 'Boy, the U.S. is doing great. We wish that Europe or Japan could do as well.'"

Still, Mr. Bernanke acknowledged that his view might appear to be one of a globalist or member of the elite.

"I fully acknowledge that doing well on the whole doesn't mean doing well for everybody, and there are a lot of people who have been left behind or have not done as well as the average," he said.

That unevenness, he said, has led to much of the populism sweeping the globe.

"I think a lot of the populist reactions in the world, perhaps even more so than in the United States, is against immigration, which reflects cultural anxiety," he said, explaining that he believes part of the country is asking, "Are we becoming a minority in our own country?"

He said he was struck by a recent economic paper by Anne Case and Angus Deaton of Princeton University looking at the high mortality rate among white men with only a high school education.

"Clearly there is very substantial stress among a large part of the population," Mr. Bernanke said. "Some of it is cultural-social, and I'm not really an expert on those things. Some of it is economic inequality, disruption from trade and technology, slow productivity growth, which means slow wage growth."

Mr. Bernanke, who was always a careful speaker when testifying to Congress, was mostly circumspect when it came to directly commenting on President Trump. A rare moment of direct commentary came when the conversation turned to tax policy and some of the ideas the Trump administration has floated.

"In tax policy, corporate tax reform could be helpful if it stimulates capital investment, but as a practical matter it doesn't look like major reform is very likely," he said, brushing aside Mr. Trump's claims that a tax code overhaul is imminent.

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"We might have lower tax rates, maybe balanced to some extent by closing some loopholes, that would be a better policy," Mr. Bernanke said. "I don't think it's going create a productivity miracle or anything like that, but it would be more efficient. It would probably improve investment a little bit."

And while Mr. Bernanke was intrigued by the notion of a border adjustment tax, he was skeptical of this, too.

"I think politically it seems very unlikely to happen," he said. He added that it was "a really interesting idea, and it's based on some very careful thinking about the tax code."

The biggest headwind it faces, he said, is "there is not much confidence that the dollar would appreciate by 25 percent" — which would be required to make the math work — and "the import industry sees it as a big threat to their profits, so it'll be highly contested."

And what about Mr. Trump's infrastructure plans?

"I think there is scope for smart infrastructure investment to be helpful," Mr. Bernanke said, contending that it might make the country more productive by lowering the time people spent in traffic, for example.

He has also been following the debate about repealing Dodd-Frank and the seemingly similar calls by Gary Cohn, the head of the National Economic Council, and Senator Elizabeth Warren to bring back some version of Glass-Steagall, which would separate commercial and investment banking. (At the same time, Mr. Bernanke made an unpopular — though accurate, in my view — argument: "I don't think the repeal of Glass-Steagall was a very important factor in the financial crisis.")

Then, with a smile, Mr. Bernanke turned into a political analyst: "I think the idea that Gary Cohn and Elizabeth Warren agree on this may be a little bit overstated."

He said: "I think the Republican perspective, which I assume Gary Cohn is thinking about, although I don't know, is to go back to the old world before the crisis, where you had free-standing investment banks and importantly, from the perspective of the free-standing investment banks, they weren't controlled. They weren't regulated by the Fed. They didn't have any of the bank regulation."

On the other hand, he said, "I think the left or Democratic view of Glass-Steagall is we're going to break up these universal banks, we're going to reduce their political power, but we're not going to deregulate — we're going to make all the components subject to tough supervision."

Finally, he said he had been thinking about the potential for robots to take our jobs and upend the economy, something that he thinks should be watched.

"You have to recognize realistically that A.I. is qualitatively different from an internal combustion engine in that it was always the case that human imagination, creativity, social interaction, those things were unique to humans and couldn't be replicated by machines," he said. "We are coming closer to the point where not only cashiers but surgeons might be at least partially replaced by A.I."

That could be a problem for Democrats and Republicans alike.