Bernanke to Grads: No Repeat of '70s

At Harvard, Fed Chief Notes Differences

The U.S. economy is well positioned to weather its current challenges, Federal Reserve Chairman Ben S. Bernanke said yesterday, because it is more flexible than it was a generation ago and policymakers know better how to respond.

In a speech at Harvard University's graduation exercises, Bernanke compared the current economy to that of 1975, when he graduated from the school. "Then, as now, we were experiencing a serious oil price shock, sharply rising prices for food and other commodities, and subpar economic growth," he said.

But he noted that the nation is better equipped in 2008 to deal with these problems. "Today's situation differs from that of 33 years ago in large part because our economy and society have become much more flexible and able to adapt to difficult situations and new challenges," Bernanke said, according to a prepared text.

In the past five years, oil prices have risen by about the same amount, in percentage terms, as they did in the early 1970s -- but the economic consequences have not been as severe. Joblessness remains low, and economic growth has been slowing mainly because of the weak housing market.

One reason, Bernanke said, is that businesses and consumers have responded to higher fuel prices by becoming more efficient.

"The great improvement in energy efficiency was less the result of government programs than of steps taken by households and businesses in response to higher energy prices, including substantial investments in more energy-efficient equipment and means of transportation," the Fed chief said.

By contrast, in the 1970s, the government intervened to try to keep gasoline prices from rising -- leading to long lines at gas pumps, rationing, and less exploration for new oil than would otherwise have happened.

Moreover, so far in this episode, a dangerous cycle of wages and prices spiraling upward has not occurred -- but Bernanke noted the risk if the Fed is not vigilant.

"From the perspective of monetary policy, just as important as the behavior of actual inflation is what households and businesses expect to happen to inflation in the future," Bernanke said. "Some indicators of longer-term inflation expectations have risen in recent months, which is a significant concern for the Federal Reserve. We will need to monitor that situation closely."

Bernanke recalled that the speaker at his own Harvard Class Day in 1975 was a sharp-edged humorist and civil rights activist, Dick Gregory. Not so this year. "Central bankers don't do satire as a rule," he offered.

And, having noted that past speakers have included the over-the-top fictional character Ali G, the Fed chairman said: "Let me now turn to the other economic challenge that I want to highlight today -- the productivity performance of our economy. At this point you may be saying to yourself, 'Is it too late to book Ali G?' "