Of all the organs of American administrative government, the Federal Reserve System, which oversees the banking system and capital markets, is far and away the best.
Its 12 regional banks are distributed evenly across the country. Each has a professional staff of bank examiners and economic analysts, a counterpart advisory committee of leaders of the banks it oversees, a state-of-the-art check-clearing operation, a board of directors led by local business executives and scholars, and strong links to universities and community groups.
The regional banks are yoked together relatively tightly (through the appointments process and various committees) to the Federal Reserve Board in Washington. Its seven governors and their chairman are appointed by the president–with the informal (but firm) advice and consent of the financial markets. All of this ensures a steady flow of top-quality information back and forth between the grass roots of commerce and the highest level of policy-making. It keeps the American economy ticking with enviable reliability.
The fact that the Fed earns its own keep and then some–the interest on its portfolio of bonds amounts to nearly $20 billion a year, most of which it turns over to the Treasury Department–means that its decision-making is relatively independent of both Congress and the White House.
In other words, it’s just the kind of organization you’d like to have looking out for your science and technology policy.
Interestingly enough, the question of technology policy came up last week. The regional banks compete to sponsor annual research conferences; Boston, Chicago, San Francisco and Kansas City are among the most prominent. The idea is to bring together a handful of prominent authorities before an audience of scholars, bankers, businessmen and journalists in order to formulate as sharply as possible the latest thinking on a topic of particular interest to the Fed: the international monetary system one year, the capitalization of the insurance industry the next, widening inequality the year after.
So last week the Boston Fed assembled a crew of experts on Cape Cod to talk about what the government might do to influence the rate and direction of inventive activity in a time of sharply falling federal science budgets. After all, some of the most recent thinking in economics has fastened on government policy to explain the vast differences in growth rates of, say, the United States and the Soviet Union over 50 years.
Political decentralization, free trade, orderly markets, antitrust policy, intellectual property protection, education policy, selective tax incentives–all these are now seen as critical determinants of the wealth of nations.
Even for the well-prepared there are surprises, however, and news Friday of surprisingly strong growth in jobs in May briefly upstaged the agenda of the meeting. President Clinton, who is running for re-election, was delighted by the news, which showed the economy to be in robust health. He called a little news conference in the Rose Garden to celebrate. But the pace of job creation was a little too robust for the bond market, which fears that buoyant growth will rekindle inflation. So bond prices tumbled on fears that interest rates will be raised when the policymaking Federal Open Market Committee meets in July.
It was ironic, because the day before the Federal Reserve chairman had spoken to the Cape Cod group about his own theory of the antsy atmosphere that afflicted political rhetoric during the winter presidential primaries. The economic expansion had been unfolding for five years, the economy was at full employment, inflation had been contained, asset prices had boomed, the layoff rate was historically low–“yet a sense persists that something is fundamentally wrong,” Alan Greenspan said.
The anxiety, the chairman said, “appears to be rooted in one of those rare, perhaps once-in-a-century events–a structural technological advance. The advent of the transistor and the integrated circuit and, as a consequence, the emergence of modern computer, telecommunications and satellite technologies have fundamentally changed the structure of the American economy.
“A hundred years ago, physical brawn was critical to value-added determination. People who personally could lift rolled sheet steel and help haul it from one part of the plant to another performed an activity that was valuable in the marketplace. Today, several generations later, the structure of production has become, to a remarkable degree, idea-determined,” Greenspan said.
However beguiling Greenspan’s theories of the weight-to-value ratio of the gross national product may be, they are not economic science. To his credit, the chairman knows it. He knows also that a veritable revolution in our understanding of the economics of technical change is unfolding in the universities, bringing into focus the economic ideas formerly associated with Joseph Schumpeter and Nikolai Kondratief–ideas concerned with identifying the winners and losers of technological revolutions.
Indeed, it was fascinating to watch the elaborate and well-articulated community of specialists in monetary policy as they sought to come to grips with the poorly understood world of scientific and technological change. Experts sensitive among themselves to the slightest nuances in discussions of credit market operations sought earnestly–but often vainly–to fathom controversies in another dimension.
Then Friday dawned with its unexpected news. The monetary experts responded–well, expertly. Policymakers consulted among themselves, authorities gave interviews, reporters phoned wire services. The surprise was assimilated with little ado.
Under the circumstances–the blue sky, the bright water–it was easy to imagine a time not so distant when the scientific community would enjoy a similarly well-organized corps of administrators and regulators–intimately connected on the one hand to the universities, hospitals, laboratories, giant corporations and tiny startups where new knowledge is created; on the other to the highest levels of government–pursuing an ever-deepening understanding of the channels through which their influence is felt in daily life.
Perhaps such a system will arise naturally out of the health care reform that is in the air. After all, the biomedical revolution is where the action is these days. Virtually all the issues that don’t have to do with defense are health-related. But this much is clear: Science and technology policy have a long way to go before they are as well understood as monetary policy.
