The South Carolina Council on Economic Education
Ladies and gentlemen, it is a pleasure and a privilege to address you today, both for professional and personal reasons. On the professional side, economic education is a subject close to my heart. There are few higher callings in this life--at least from the perspective of a professional economist and policymaker like me--and I can't overstate the importance of your work. In today's world, our nation's economic policies can either unleash the creative energies of average citizens and raise the quality of our lives or do the opposite--often with astonishing force and speed. Poor economic outcomes, of course, are the result of poor economic policies, and poor economic policies, in turn, usually rest on economic half-truths or worse. Economic education offers our best chance to make the half-truths whole.
You teachers--with the support of the South Carolina Council on Economic Education, state and local government, and the business community--are helping your students understand economic policy and the markets through which it works. I applaud all of you as loudly as I possibly can. Just as the Fed must be ever-vigilant to the threat of inflation, you must be vigilant to the threat of economic illiteracy. And our missions are not separate--for economic illiteracy is the seed from which inflation and other economic and financial problems grow.
That's the professional side. On the personal side, it is a privilege to be here because the teaching profession also holds a special place in my heart. My mother was a high school English teacher in the Richmond public schools for much of her adult life, and she taught me how important knowledge is to the quality of one's life. 'Why Johnny Can't Read'--or in this case, 'Why Al Can't Read'--was never destined to be a topic in our household. Al could and would read. My mother also showed me how hard teachers work. I have vivid memories of her grading papers until one or two in the morning and then getting up at 6:00 or 6:30 to prepare for another day in the classroom.
Beyond this, I've actually been a public school teacher myself, although briefly. Back in the early 1960s I had a Fulbright scholarship for a year at the University of Strasbourg in France. When I returned to the States, I had about three months before my scheduled entrance into the Army, and I had trouble finding a job for such a short period. My mother, however, heard about a temporary opening for a French teacher in a junior high in Richmond, and I was fortunate enough to get the job. I taught seventh graders. Those of you who've taught seventh graders know I'm not exaggerating even a little when I tell you that my brief tenure as a teacher was easily the most challenging professional experience I've ever had.
So, again, I have the highest regard for teachers and the important role you play, from both a personal and professional perspective. Today, though, I want to focus on the professional side. The main thing I want to do this afternoon is to underline just a couple of points you probably understand already. First, if we expect to enjoy a strong and growing economy with all the opportunities that condition brings, we must have high quality economic policy. And if we want good economic policy, the public--or a sizable portion of it, at least--must have a good working knowledge of economic concepts. Obviously that's where you folks and economic education come in. And we in the Fed and in other institutions that make economic policy as well as private business enterprises have an obligation and a substantial stake in helping you succeed. Second, if people are to make intelligent judgments about economic policy issues, they need to know more than just facts about the economy and institutional detail. They need to understand at least a little about economic analysis and some of the tradeoffs and paradoxes it reveals. Why, for example, are there tradeoffs between economic regulation and income redistribution, on the one side, and economic growth on the other? And, closer to my own work, why is it not necessarily a good idea for the Fed to focus primarily on keeping short-term interest rates low?
I've emphasized the importance of good economic policy, and I think that emphasis is well- placed, probably more today than ever because of the intense integration of economic activity both nationally and internationally. A hundred years ago, we really did not have a truly national American economy, let alone a truly international economy. Our own 19th century presidents and Congresses had remarkably limited direct influence over American commerce except in time of war. And, internationally, the world was still pretty much a loose confederation of regional and local economies.
All that has changed in the 20th century. For this has been the century of Marconi and the Wright brothers, Ford and Rockefeller, the Roosevelts and Einstein, and now Bill Gates. The national economy is now highly integrated, and international commerce is expanding rapidly. In this environment, public economic policy--whether it be national budgetary policy, Federal Reserve monetary policy, or regulatory policies--have immediate and often powerful effects on all of us. And inferior policy is no longer just a nuisance; it can be a major obstacle to growth and prosperity and on occasion even a disaster as we learned from the Great Depression.
Poor economic policy can have many causes, but in a democratic society like the United States, the root cause can only be a public that is either uninformed about economic issues or disinterested or both. This condition is the enemy of good public policy, and you folks obviously are on the front lines in attacking it. At the end of the day, the general public must be a full partner in making economic policy. The current debates regarding the accuracy of the Consumer Price Index and reform of Social Security and Medicare are front-page stories. Citizens need not understand all of the technical details associated with these issues, but they do need to understand the basic choices in each case and the potential consequences of each choice. I, for one, intend to do my homework on Social Security, because the decisions made on this issue will have an especially forceful impact on my future and my family's future as my wife and I approach senior citizenhood.
If we can agree that good economic policy is desirable, and that a fuller understanding of economic issues is a necessary condition for better policy, we need to take the next step. A keener appreciation of economic issues can only arise from reasoned discourse. But without the common framework and common language that economics provides, debate and discussion degenerate into noise. 'Why Johnny Can't Read' stimulated much reflection among English teachers a few years back about why good English is so important. Poor English implies poverty of thought and logic, and an absence of coherence. Good English, in contrast, enables us to engage in accurate, unambiguous conversation and thought.
The language of economics has developed for the same reasons--to purge our economic debates of unnecessary ambiguity and inconsistency. For some reason the public seems to regard economists as a bunch of squabbling children who can't agree on anything. I'm sure you've all heard the old saw about how if one laid all the economists in the world end to end they'd never reach a conclusion. Economists do disagree on a lot of things, which is not terribly surprising given the complexity and uncertainty surrounding many of the phenomena they deal with.
But there are also many points on which virtually all economists agree, such as the benefits of competition and unfettered international trade and the eventual inflationary impact of persistently excessive growth in the money supply. This agreement is captured by the unifying and clarifying language of economics. The beauty of this language is often obscured by the erroneous if understandable perception that economics consists mainly of forecasting the near-term behavior of the economy--what's going to happen to the unemployment rate and inflation and interest rates and the dollar. While economic forecasts can be useful, and are probably necessary for some purposes, short-term forecasting has never been a major focus of the true giants of the economics profession like Keynes, Irving Fisher, Paul Samuelson, and Milton Friedman in our own century. These economists and all great economists have been primarily interested in understanding how different economic systems work, and which systems and which economic policies are most effective in increasing the economy's productive efficiency and raising the living standards of real people. So I hope you will help us inform people that forecasts are just one of many topics that can be conveyed using the vocabulary of economics.
Bottom line: Two centuries of economists have given us the tools with which to debate economic issues in a productive manner. Economics imposes a consistent logic on which we can hang our evidence. We need to convey a sense of this unifying language of economics to the student in the classroom and the man in the street.
Let me offer just a couple of examples of the power of economics in dealing with major contemporary economic issues. There is a great deal of concern currently about the health of the U.S. Social Security System--and understandably so since it will be severely strained when the baby boomers begin to retire in larger numbers. There is much discussion and debate about what to do, and some of it gets pretty noisy and incoherent. Economics can help. Economics makes it clear that the only real way out of this box is through greater productivity, which will require a larger national capital stock. To build this capital we will have to consume less and save more as a nation. If more Americans understood this clearly, we could have a more efficient public discussion about the merits of particular reform proposals.
As a second example, closer to home, my years of studying monetary economics have firmly convinced me that the closer we come to ridding our economic system of inflation once and for all, the better off we are likely to be. Further, I've concluded that the rate of inflation is the one and only macroeconomic variable that the Fed can control decisively over the long run. Therefore, controlling inflation should be the principal thrust of monetary policy.
These twin precepts--no inflation is best, and the Fed can only control inflation--did not come to me in some sort of inspired vision or in a single lesson. They emerged only after years of studying economics in college, graduate school, and at the Fed, and looking at the empirical evidence from the real world. Most of all, I had to discuss and debate and argue these points with teachers and colleagues in an atmosphere of mutual respect that required a common framework and a common language. The press often describes the Federal Open Market Committee--the arm of the Fed that conducts monetary policy--as 'collegial.' This description is apt, not because we agree on everything, but because we disagree within a shared framework.
Unfortunately, public policy discussions are often consumed reestablishing basic points of economic knowledge that every high school student ought to know. Some extremely important debates never get much beyond this level if they get to it at all. Then, we get misguided policies that a prior investment in economic education could have prevented. In the 1960s and 70s, for example, we chose to ignore the most obvious lessons of monetary economics. We thought we could buy prosperity by printing money; the result was double-digit inflation, 20 percent plus interest rates, and ultimately the worst recession since the Depression.
Economic illiteracy is preventable and economic education is the vaccine. But the job is not nearly done. Two things are required to get it done. First, the economics profession must give a higher priority to broad economic education aimed at the general public. Second, we must support teachers like you more strongly and more effectively.
I'll begin with a confession. The economics profession has not always been an enthusiastic participant in the broad public education effort. Too many of my fellow economists are largely indifferent to economic education for the general public. I am proud to say that the Federal Reserve System is deeply committed to economic education. Each of the 12 Federal Reserve Banks--including ours--has at least one specialist devoted to supporting economic education. Indeed, in our Bank, several of my colleagues work in this area.
And at the Richmond Fed our economic education programs are growing rapidly. We support the state Councils on Economic Education in several ways--my visit with you today is just a small example of this effort. We publish a magazine called Equilibria devoted to economic education and produce a variety of other educational materials that we distribute free of charge to educators, students, and the general public. We sponsor the Fed Challenge, a contest in which high school students compete on stage at a mock Federal Open Market Committee meeting. I serve on the boards of the Virginia Council on Economic Education and the E. Angus Powell Endowment for Economic Education. Some of my colleagues at the Richmond Fed serve on the boards of other economic education organizations. And my colleagues and I spend a great deal of time on the road lecturing at colleges, high schools, and business and civic group meetings. Our Bank has just turned on its World Wide Web site--a tool through which teachers and others will be able to gather resources. In short, we are already committed and active, and we want to do more.
The progress economic educators have made is remarkable, but we need to do an even better job and ask more of those we teach. My economics education began when I took a sophomore principles of economics course in college. That course was probably the hardest course I ever had. Part of my problem was that this was my first classroom exposure to economics. Today, thanks to the state councils and organizations like the Powell Endowment, most college freshmen have already had an introduction. But the lack of prior training was not the real reason my sophomore principles course was so challenging. It was a tough course because my professor--a wonderful teacher named John Gunn at Washington and Lee University--made it tough. He absolutely demanded that we firmly grasp the fundamental principles of the discipline--and I mean understand them backwards and forwards. I got a B in the course, but that B was easily equivalent to any three A's I ever received in other courses. His course made such an impression on me that I never got over it. It was almost entirely because of that experience that I eventually opted to become a professional economist.
In contrast to my experience, I am told by many young people, to my astonishment, that college courses in economics at many schools are now considered relatively easy--respites from the really demanding courses. Maybe this is because, unlike me, many students have already been introduced to economics in high school. I fear, though, an earlier introduction may not explain fully the newfound reputation of economics (at least in some circles) as an 'easy' subject. My fear is that we may have shifted away from teaching students the language and the logic of economics toward presenting more easily understood institutional detail and superficially sexier related topics like how to manage one's personal finances. These are worthy objects of study, to be sure, but they should not replace the basic core principles of economics in introductory courses, either in college or high school.
Let me pose a question to illustrate what I mean. When you discuss the Federal Reserve with your students--and I hope you do--how much time do you spend discussing institutional details as opposed to the substance of what the Fed can and cannot do? Institutional questions might include the following: How many Federal Reserve Governors are there? Who appoints Governors? Who serves on the Open Market Committee? And so forth.
More substantive questions would include the following: How does the Fed control inflation in the United States? How does the Fed influence long-term interest rates? Does the Fed control the rate of unemployment?
At this point in my life, there's some fun in thinking that somewhere in South Carolina, some high school examination might ask: 'Who is Al Broaddus?' But in all honesty, I'd rather you ask students to explain how the Fed uses short-term interest rates and other tools to reduce inflation and improve the performance of the economy and our standard of living.
As hopefully I've already indicated, what your students learn is not merely academic. If ignored, the laws of economics can bite back in ways that are painfully real. Let's suppose Johnny can read but he hasn't had any introduction to economic analysis and really doesn't know how to think 'economically' at all.
Johnny--someone else's former student, of course--has gone to work for an auto parts manufacturer here in South Carolina. He hears a radio commentator assert that lower interest rates raise economic growth and, moreover, that the Federal Reserve has the power to reduce rates by injecting more money into the economy. Johnny meets a Fed official--let's call him Al--and asks why the Fed doesn't go ahead and push rates down to spur economic growth and reduce his adjustable mortgage rate in the bargain. Al tells Johnny that economic growth is determined by the growth of labor productivity over the longer term. And productivity growth, in turn, is determined by investment in new and technologically more advanced plants and equipment--investment that is more responsive to tax policy than monetary policy. He goes on to say that experience and evidence teach that the best way for the Fed to facilitate long-term growth is to maintain a stable price level so that the risk of inflation is removed from investment decisions. To convince Johnny of this, Al points out that long-term interest rates contain an inflation premium to compensate bondholders and other lenders for the erosion of the real value of their investments expected from future inflation--the greater the expected inflation, the higher the inflation premium and interest rates. Consequently, if the Fed pushes a lot of money into the economy to stimulate growth, over the long run it is more likely to stimulate inflation, which will eventually push long-term rates up rather than down and probably reduce growth rather than raise it.
Johnny's a bright fellow and he knows that Alan Greenspan is the Chairman of the Federal Reserve Board. But Johnny never learned much about the relationship between interest rates and inflation, because no one ever asked him to. So Johnny doesn't buy what Al tells him--or any other economist for that matter. But Johnny is a good citizen, and he votes, and he along with many others press their elected officials to press the Fed to print more money to force interest rates down. The Fed, of course, enjoys a degree of independence from day-to-day politics, so it has some ability to resist the pressure. But the United States is a democracy, and the Fed's independence is appropriately limited. If enough Americans want the Fed to provide more liquidity to reduce interest rates, at some point the Fed may be compelled to comply. But, as Al's comments to Johnny attempted to suggest, the easier monetary policy may increase inflation, interest rates, and investment risk over time and ultimately reduce the growth of output and jobs. In that event it would be too bad that Johnny and others hadn't had enough substantive education about how the economy really works to think more critically about the economic policies they favored.
Economic education--and especially good economic education--is expensive. But as former Harvard President Derek Bok once said, 'If you think education is expensive, try ignorance.' For 40 years, we have asked why Johnny can't read, but whatever the answer, we at least have asked him to read. If we ask why Johnny can't think economically, the answer is often, I fear, because we haven't even asked him to try. I hope you folks and all of your colleagues around the nation will do whatever you can to fix this problem. And I hope the business community and public institutions involved in policymaking will support you aggressively in this exceedingly important work. As I said earlier, we in the Fed intend to do just that. There is simply no way we can consistently pursue monetary policies that will help maximize the economy's performance without the support of an economically literate public. By the same token, the business community cannot expect to maximize shareholder value unless the macroeconomic and regulatory policy environments are rational and conducive to corporate and small business growth. Again, consistent policies meeting these standards require the consistent support of a public that knows how to think about economic policy.
In name, I have spoken with you today about economic education. But in fact, I have spoken about a covenant--a great covenant whose signatories have spanned the whole of the 20th century and much of the globe--a covenant which, if kept, offers boundless opportunity to us and to our descendants, but if broken, can undermine our efforts to better our economic performance and can neutralize the economic achievements of the generations that preceded us. We need to understand that we here today are the guardians of this covenant.
The covenant is simply this: We, the public, are entitled to enjoy the fruits of our efforts, our markets, and our technologies. In exchange, we citizens must educate and inform ourselves about economics, so that we can choose the fiscal, monetary, and regulatory policies and systems that promote and sustain economic prosperity.
You and I and the rest of the world are bound together in an economic engine as big as earth itself. And this engine has lifted much of mankind to standards of living beyond the imaginations of all the kings and queens of all the prior years of human history. But like the covenants of old, our covenant carries both rights and responsibilities, and you and I and all our fellow citizens are its stewards. You, though, as teachers, hold the key to the covenant, and therefore your task is especially vital. So all of my colleagues at the Fed and I send our best wishes for great success to each of you and, again, our pledge of full support.