Ben’s world


IS THE U.S. ECONOMY OVERHEATING? That is the issue facing the new chairman of the Federal Reserve, Ben Bernanke, an avowed inflation hawk who compares economic policymaking to driving a car while looking in the rearview mirror. In other words, only in retrospect do you know the answer to such questions.

Economists are an anxious lot. In bad times they fret with the rest of us; in good times they fret that too much of a good thing will trigger inflation. That is why the Federal Reserve has been gradually raising short-term interest rates, applying a brake lest things get too rowdy, since the summer of 2004.

In his testimony before Congress last week, Bernanke suggested that the central bank isn’t done tightening.


Compared to his predecessor, Alan Greenspan, Bernanke was concise and clear in answering questions, and it was a welcome departure to see the Fed chairman refuse to take sides on fiscal policy matters that are beyond his brief. Asked about the wisdom of current tax policy, Bernanke said: “This is what the people have elected you to do.”

Bernanke’s own job is daunting enough. He has to gauge whether the housing market is slowing down (seems like it is, but January turned out to be a bullish month); whether energy prices will continue climbing (seems like they will -- and that’s without knowing what will come of Iran’s nuclear gambit -- but in recent weeks crude oil prices were slipping); and whether the tightening labor market will lead to inflationary pressures (unemployment is down to 4.7%, but workers have yet to reap the full benefits of a solid expansion). The Fed chairman also has to be wondering why Uncle Sam’s irresponsible deficit spending is not driving up long-term interest rates, as Econ 101 students are taught.

The answers to many of the nation’s economic riddles lie overseas. The U.S. economy thrives thanks to the largess of foreigners, who save too much and send their capital -- not to mention some of their brightest minds -- to this country.

It’s a virtuous cycle, potentially jeopardized by rising protectionist sentiment in Washington. Talk of American economic decline is nonsensical: The nation accounted for 27% of global economic output in the year 2000, compared with 26% in 1960.

And for now, the U.S. economy is poised for a healthy year, despite a disappointing fourth quarter last year. Consumer spending is robust, as are corporate profits. And Friday’s release of monthly inflation figures show there is little reason to be unduly alarmed.

With so much good news breaking out, Bernanke will have plenty to fret about.