Bernanke is wrong to be complacent

The long-term outlook for the US economy is not as rosy as he thinks

Financial markets were anxious to hear what Ben Bernanke, the Governor of the US Federal Reserve, had to say about the immediate future in his speech on Friday to the Federal Reserve Bank of Kansas City's Jackson Hole symposium. After the Fed's recent announcement that short-term interest rates in the US are likely to remain at near-zero levels until at least the middle of 2013, they hoped for a signal that Bernanke would also authorise another round of quantitative easing (QE) to boost the ailing US economy. In the event he simply reminded his audience that the Fed had a "range of tools that could be used to provide additional monetary stimulus".

It is unfortunate that this short-term focus has distracted attention from what the Governor had to say about the longer-term outlook for the US economy. Bernanke is an optimist, dismissing the prospect of a prolonged period of economic stagnation in the US and other western economies and expecting a return to the growth rates and levels of employment seen before the financial collapse and recession. And he thinks this will happen if policymakers stick to the same formulae they have been applying for many years. Thus, the job of the Federal Reserve is to ensure inflation remains low and stable over time and that of the Administration and Congress is to put in place a credible plan to stabilise and then reduce government debt. It is almost as if the financial crisis and recession never happened.

Bernanke must be aware of the studies, such as those by the IMF and Reinhart and Rogoff, which show recessions that follow periods of massive debt accumulation, asset bubbles and financial crises tend to be followed by long periods of economic pain and turmoil. In such circumstances, monetary policy, including quantitative easing, does not work because there are too few borrowers and lenders are reluctant to lend. Household and business confidence is low, making them reluctant to take on more debt, while banks are focused on repairing their balance sheets, rather than expanding them. Fiscal policy can be effective in supporting growth for a period, but eventually reaches a point at which further stimulus is impossible and pressures grow for a reversal of policy. This is a pretty good description of the state of affairs in the US right now. Spending cuts will detract from growth but monetary policy is largely impotent to offset their effect. Japan in the 1990s is the template for what happens next: disappointing growth for many years.

Bernanke should also be asking himself what the events of the last four years tell us about the underlying strength of the US economy. GDP growth rates during the period from 2000 to 2007 were not at all exceptional and yet it turns out that a significant proportion of this growth was generated by financial engineering, debt acquisition and asset bubbles, particularly in housing. Growth would have been very disappointing if all the unsustainable bits had not occurred. Did some combination of the emergence of China, the financialisation of the US economy, reduced investment in productive capacity and the stagnation in median wages hold back growth, or was it due other factors? Until this question is asked and answered, it is difficult to be confident that the US economy will grow at a healthy pace in the long-term. That's bad news for the global economy too.

Perhaps it is in the job description of the Governor of the Federal Reserve to be optimistic about the US economy. One can imagine politicians would be quick to accuse Bernanke of "running down our economy" if he was not. But from this side of the Atlantic, his speech sounds dangerously complacent.

Tony Dolphin is senior economist at the Institute for Public Policy Research (ippr)

Tony Dolphin is chief economist at IPPR

Getty
Show Hide image

The 8 bits of good news about integration buried in the Casey Review

It's not all Trojan Horses.

The government-commissioned Casey Review on integration tackles serious subjects, from honour crimes to discrimination and hate crime.

It outlines how deprivation, discrimination, segregated schools and unenlightened traditions can drag certain British-Pakistani and Bangladeshi communities into isolation. 

It shines a light on nepotistic local politics, which only entrench religious and gender segregation. It also charts the hurdles faced by ethnic minorities from school, to university and the workplace. There is no doubt it makes uncomfortable reading. 

But at a time when the negative consequences of immigration are dominating headlines, it’s easy to miss some of the more optimistic trends the Casey Report uncovered:

1. You can always have more friends

For all the talk of segregation, 82 per cent of us socialise at least once a month with people from a different ethnic and religious background, according to the Citizenship Survey 2010-11.

More than half of first generation migrants had friends of a different ethnicity. As for their children, nearly three quarters were friends with people from other ethnic backgrounds. Younger people with higher levels of education and better wages are most likely to have close inter-ethnic friendships. 

Brits from Black African and Mixed ethnic backgrounds are the most sociable it seems, as they are most likely to have friends from outside their neighbourhood. White British and Irish ethnic groups, on the other hand, are least likely to have ethnically-mixed social networks. 

Moving away from home seemed to be a key factor in diversifying your friendship group –18 to 34s were the most ethnically integrated age group. 

2. Integrated schools help

The Casey Review tells the story of how schools can distort a community’s view of the world, such as the mostly Asian high school where pupils thought 90 per cent of Brits were Asian (the actual figure is 7 per cent), and the Trojan Horse affair, where hardline Muslims were accused of dominating the curriculum of a state school (the exact facts have never come to light). 

But on the other hand, schools that are integrated, can change a whole community’s perspective. A study in Oldham found that when two schools were merged to create a more balanced pupil population between White Brits and British Asians, the level of anxiety both groups felt diminished. 

3. And kids are doing better at school

The Casey Report notes: “In recent years there has been a general improvement in educational attainment in schools, with a narrowing in the gap between White pupils and pupils from Pakistani, Bangladeshi and African/Caribbean/Black ethnic backgrounds.”

A number of ethnic minority groups, including pupils of Chinese, Indian, Irish and Bangladeshi ethnicity, outperformed White British pupils (but not White Gypsy and Roma pupils, who had the lowest attainment levels of all). 

4. Most people feel part of a community

Despite the talk of a divided society, in 2015-16, 89 per cent of people thought their community was cohesive, according to the Community Life Survey, and agreed their local area is a place where people from different backgrounds get on well together. This feeling of cohesiveness is actually higher than in 2003, at the height of New Labour multiculturalism, when the figure stood at 80 per cent. 

5. Muslims are sticklers for the law

Much of the Casey Report dealt with the divisions between British Muslims and other communities, on matters of culture, religious extremism and equality. It also looked at the Islamophobia and discrimination Muslims face in the UK. 

However, while the cultural and ideological clashes may be real, a ComRes/BBC poll in 2015 found that 95 per cent of British Muslims felt loyal to Britain and 93 per cent believed Muslims in Britain should always obey British laws. 

6. Employment prospects are improving

The Casey Review rightly notes the discrimination faced by jobseekers, such as study which found CVs with white-sounding names had a better rate of reply. Brits from Black, Pakistani or Bangladeshi backgrounds are more likely to be unemployed than Whites. 

However, the employment gap between ethnic minorities and White Brits has narrowed over the last decade, from 15.6 per cent in 2004 to 12.8 per cent in 2015. 

In October 2015, public and private sector employers responsible for employing 1.8m people signed a pledge to operate recruitment on a “name blind” basis. 

7. Pretty much everyone understand this

According to the 2011 census, 91.6 per cent of adults in England and Wales had English as their main language. And 98.2 per cent of them could speak English. 

Since 2008-2009, most non-European migrants coming to the UK have to meet English requirements as part of the immigration process. 

8. Oh, and there’s a British Muslim Mayor ready to tackle integration head on

The Casey Review criticised British Asian community leaders in northern towns for preventing proper discussion of equality and in some cases preventing women from launching rival bids for a council seat.

But it also quoted Sadiq Khan, the Mayor of London, and a British Muslim. Khan criticised religious families that force children to adopt a certain lifestyle, and he concluded:

"There is no other city in the world where I would want to raise my daughters than London.

"They have rights, they have protection, the right to wear what they like, think what they like, to meet who they like, to study what they like, more than they would in any other country.”

 

Julia Rampen is the editor of The Staggers, The New Statesman's online rolling politics blog. She was previously deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines.