JACKSON HOLE, Wyo. (MNI) – The following is the third and final
section of Federal Reserve Chairman Ben Bernanke’s remarks prepared for
the Kansas City Fed’s Symposium under way Friday:

The quality of economic policymaking in the United States will
heavily influence the nations longer-term prospects. To allow the
economy to grow at its full potential, policymakers must work to promote
macroeconomic and financial stability; adopt effective tax, trade, and
regulatory policies; foster the development of a skilled workforce;
encourage productive investment, both private and public; and provide
appropriate support for research and development and for the adoption of
new technologies.

The Federal Reserve has a role in promoting the longer-term
performance of the economy. Most importantly, monetary policy that
ensures that inflation remains low and stable over time contributes to
long-run macroeconomic and financial stability. Low and stable inflation
improves the functioning of markets, making them more effective at
allocating resources; and it allows households and businesses to plan
for the future without having to be unduly concerned with unpredictable
movements in the general level of prices. The Federal Reserve also
fosters macroeconomic and financial stability in its role as a financial
regulator, a monitor of overall financial stability, and a liquidity
provider of last resort.

Normally, monetary or fiscal policies aimed primarily at promoting
a faster pace of economic recovery in the near term would not be
expected to significantly affect the longer-term performance of the
economy. However, current circumstances may be an exception to that
standard view–the exception to which I alluded earlier. Our economy is
suffering today from an extraordinarily high level of long-term
unemployment, with nearly half of the unemployed having been out of work
for more than six months. Under these unusual circumstances, policies
that promote a stronger recovery in the near term may serve longer-term
objectives as well. In the short term, putting people back to work
reduces the hardships inflicted by difficult economic times and helps
ensure that our economy is producing at its full potential rather than
leaving productive resources fallow.

In the longer term, minimizing the duration of unemployment
supports a healthy economy by avoiding some of the erosion of skills and
loss of attachment to the labor force that is often associated with
long-term unemployment.

Notwithstanding this observation, which adds urgency to the need to
achieve a cyclical recovery in employment, most of the economic policies
that support robust economic growth in the long run are outside the
province of the central bank. We have heard a great deal lately about
federal fiscal policy in the United States, so I will close with some
thoughts on that topic, focusing on the role of fiscal policy in
promoting stability and growth.

To achieve economic and financial stability, U.S. fiscal policy
must be placed on a sustainable path that ensures that debt relative to
national income is at least stable or, preferably, declining over time.
As I have emphasized on previous occasions, without significant policy
changes, the finances of the federal government will inevitably spiral
out of control, risking severe economic and financial damage.1 The
increasing fiscal burden that will be associated with the aging of the
population and the ongoing rise in the costs of health care make prompt
and decisive action in this area all the more critical. Although the
issue of fiscal sustainability must urgently be addressed, fiscal
policymakers should not, as a consequence, disregard the fragility of
the current economic recovery. Fortunately, the two goals of achieving
fiscal sustainability–which is the result of responsible policies set
in place for the longer term–and avoiding the creation of fiscal
headwinds for the current recovery are not incompatible. Acting now to
put in place a credible plan for reducing future deficits over the
longer term, while being attentive to the implications of fiscal choices
for the recovery in the near term, can help serve both objectives.

Fiscal policymakers can also promote stronger economic performance
through the design of tax policies and spending programs. To the fullest
extent possible, our nations tax and spending policies should increase
incentives to work and to save, encourage investments in the skills of
our workforce, stimulate private capital formation, promote research and
development, and provide necessary public infrastructure. We cannot
expect our economy to grow its way out of our fiscal imbalances, but a
more productive economy will ease the tradeoffs that we face.

Finally, and perhaps most challenging, the country would be well
served by a better process for making fiscal decisions. The negotiations
that took place over the summer disrupted financial markets and probably
the economy as well, and similar events in the future could, over time,
seriously jeopardize the willingness of investors around the world to
hold U.S. financial assets or to make direct investments in jobcreating
U.S. businesses. Although details would have to be negotiated, fiscal
policymakers could consider developing a more effective process that
sets clear and transparent budget goals, together with budget mechanisms
to establish the credibility of those goals. Of course, formal budget
goals and mechanisms do not replace the need for fiscal policymakers to
make the difficult choices that are needed to put the countrys fiscal
house in order, which means that public understanding of and support for
the goals of fiscal policy are crucial.

Economic policymakers face a range of difficult decisions, relating
to both the short-run and long-run challenges we face. I have no doubt,
however, that those challenges can be met, and that the fundamental
strengths of our economy will ultimately reassert themselves. The
Federal Reserve will certainly do all that it can to help restore high
rates of growth and employment in a context of price stability.

(3 of 3)

** Market News International **

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