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Posted by: Michael Mandel on October 24
Right now there’s a big love-in going on, as economists on both the left and the right fall over themselves to say what a great choice Ben Bernanke is.
I’m going to be contrary as usual and explain why I think Bernanke may be worse for innovation and technology than Greenspan has been. Let me lay out my argument, step by step.
1)Innovation is extremely risky in general.
2) Innovation is relatively less risky in periods when economic growth is strong and capital is cheap.
3) In particular, startups which depend on venture capital thrive in periods of low interest rates, because then investors are more willing to put their money into risky VC funds.
4)Greenspan was willing to let the economy run hot in the 1990s, which encouraged a whole wave of startups and innovation. Although that period ended in a bust, the investment laid the groundwork for the big productivity gains of recent years.
5) Bernanke believes in inflation targeting. In general, that policy is designed to smooth out the highs and lows of the economy. That means he almost certainly won’t be as permissive towards booms as Greenspan was.
6) Most economists don’t even see a link between innovation and the financial system, so that they don’t worry about the impact of Fed policy on technology. I may be weird, but I do worry.
Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.