Ben Bernanke has added a chapter to his narrative of the U.S. recovery.
Until Tuesday, the Federal Reserve chairman was a non-believer in the theory that the financial crisis has fundamentally altered the economy.
But like any honest policy maker, Mr. Bernanke's opinion changes as the evidence changes. He told the New York Economics Club that the "accumulating evidence does appear consistent with the financial crisis and the associated recession having reduced the potential growth rate of our economy somewhat during the past few years."
It's more a half-step than a leap. Mr. Bernanke said structural changes only are partial explanations for the painfully slow U.S. recovery and persistently high level of unemployment. "Although the nation's potential output may have grown more slowly than expected in recent years, this slowing seems at best a partial explanation of the disappointing pace of the economic recovery," he said.
Still, a shift is a shift.
Mr. Bernanke now concedes that the U.S. economy has struggled to exceed a growth rate of 2 per cent because that has become its non-inflationary maximum – at least for now. The potential U.S. growth rate before the crisis was thought to be about 2.5 per cent.
The difference could explain why the unemployment rate has fallen from a recessionary peak of 10 per cent to below 8 per cent despite lacklustre growth. That was a puzzle for Mr. Bernanke and other economists because theory suggests that economic growth must increase faster than its trend rate to pull down the unemployment rate. The recovery rarely has advanced faster than a 2.5 per cent rate since the recession ended.
Mr. Bernanke didn't offer a new potential growth rate – probably because he's not convinced the change is permanent.
He said the "extraordinarily severe" job losses that followed the crisis may have exacerbated for "a time" the mismatch between available jobs and qualified applicants. The historically high level of long-term unemployment also likely has raised the "natural" rate of unemployment and has shrunk the labour force. And productivity – a key driver of economic growth – probably has suffered because businesses cut investment during the recession, Mr. Bernanke said.
The structural question is important because it has implications for monetary policy. While 2.5 per cent growth is preferable, if an economy only is capable of 2 per cent, interest rates set to generate growth of 2.5 per cent only risk stoking inflation.
Mr. Bernanke made clear that he doesn't think the structure of the U.S. economy has changed so much that the Fed needs to rethink its policy.
If the mismatch of jobs and workers were a significant problem, you would expect wage rates in certain industries and regions to climb. That's not happening, as wage rates are broadly subdued across sectors and across the country. And even if the natural rate of unemployment – which the Fed says is 5.5 per cent to 6 per cent – has risen somewhat, current joblessness still is well above acceptable levels.