The Fed’s search for breakout growth

America’s central bank, like other big financial institutions, seeks fresh ideas to end the ‘new normal’ of mediocre economic growth. Breaking up old models is a good first step.

|
AP Photo
Federal Reserve Chair Janet Yellen testifies on Capitol Hill in Washington in June..

You won’t see this sign hanging outside America’s central bank but the message coming from the Federal Reserve is still clear: “Help wanted.” No, the Fed does not need workers. Rather, it is looking for fresh ideas.

Despite eight years of a steady but slow expansion of the US economy, the economists who control the levers of the nation’s money supply are in a big internal debate, seeking new ways to end what has been called “the new mediocre” of growth.

The Fed had expected to be raising interest rates by now, based on established models for post-recession growth. But it acknowledges the world has too many uncertainties, from low rates of productivity growth to instability in China and Europe. The 2016 growth forecast for the US economy was recently dropped from 2.4 percent to 2.2 percent. The Fed may – or may not – raise rates in September.

The “old normal” for the Fed’s long-run interest rate was 5 percent. Now it would be happy to reach 3 percent. Fed chief Janet Yellen admits that perhaps there “are factors that are not going to be rapidly disappearing but will be part of the new normal.”

The United States is not the only place in a mood to discover new ideas to break out of the “new normal.”

In a recent speech, Christine Lagarde, managing director of the International Monetary Fund, asked world financial leaders to “think beyond the narrow policy debate we have been having so far.” And the president of the World Bank, Jim Yong Kim, told CNBC in July: “If we wait for growth to pick up, then we’ll know we’ll never get there. So in other words, as the economic model changes, who knows what the next drivers of global economic growth will be?”

For its part, the World Bank is very eager to try new paths. In 2013, it set a goal of ending extreme poverty in the world by 2030. In July, it hired a respected scholar, Paul Romer of New York University, to be its chief economist. If Dr. Romer is known for anything, it is that new ideas can drive prosperity. He came to fame in the 1980s by showing how nations can manage innovation, not wait for it to happen. To achieve that, they must invest in education and research in an open and free society.

Lately, he has shown how cities can become incubators for growth. He points to the success of the Chinese city of Shenzhen in trying many reforms, such as freedom for capital markets, that then spread to other parts of China.

He likes to use a cooking metaphor to say that economic growth springs from new recipes and not only more cooking. He challenges fellow economists by asking questions like “What is the value of an idea?” He recently chided economists for producing studies with too much “mathiness.” Growth comes from how well a nation generates and disseminates new ideas, and less on measurable physical resources.

Too much economic theory is based on how to deal with resource scarcity rather than creating an abundance of ideas, he says. The historic rate of growth in the technological frontier keeps rising, as does the world’s economic growth per capita.

He, like most economists at the world’s major financial institutions, wants to find out how to keep it that way. It is not only the Fed that’s crying for help.

You've read  of  free articles. Subscribe to continue.
Real news can be honest, hopeful, credible, constructive.
What is the Monitor difference? Tackling the tough headlines – with humanity. Listening to sources – with respect. Seeing the story that others are missing by reporting what so often gets overlooked: the values that connect us. That’s Monitor reporting – news that changes how you see the world.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.

QR Code to The Fed’s search for breakout growth
Read this article in
https://www.csmonitor.com/Commentary/the-monitors-view/2016/0728/The-Fed-s-search-for-breakout-growth
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe