ben s bernanke : remarks on class day 2008 speech of mr ben s bernanke, chairman of the board of governors of the us federal reserve system, at harvard university, cambridge, massachusetts, 4 june 2008. the original speech, which contains various links to the documents mentioned, can be found on the us federal reserve system ’ s website. * * * it seems to me, paradoxically, that both long ago and only yesterday i attended my own class day in 1975. i am pleased and honored to be invited back by the students of harvard. our speaker in 1975 was dick gregory, the social critic and comedian, who was inclined toward the sharp - edged and satiric. central bankers don't do satire as a rule, so i am going to have to strive for " kind of interesting ". when i attended class day as a graduating senior, gerald ford was president, and an upand - coming fellow named alan greenspan was his chief economic adviser. just weeks earlier, the last americans remaining in saigon had been evacuated by helicopters. on a happier note, the red sox were on their way to winning the american league pennant. i skipped classes to attend a world series game against the cincinnati reds. as was their wont in those days, the sox came agonizingly close to a championship but ended up snatching defeat from the jaws of victory. on that score, as on others – disco music and pet rocks come to mind – many things are better today than they were then. in fact, that will be a theme of my remarks today. although 1975 was a pretty good year for the red sox, it was not a good one for the u. s. economy. then as now, we were experiencing a serious oil price shock, sharply rising prices for food and other commodities, and subpar economic growth. but i see the differences between the economy of 1975 and the economy of 2008 as more telling than the similarities. 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. economic policymaking has improved as well, i believe, partly because we have learned well some of the hard lessons of the past. of course, i do not want to minimize the challenges we currently face, and i will come back to a few of these. but i do think that our demonstrated ability to respond constructively and effectively to past economic problems

central banker, a particularly critical difference between then and now is what has happened to inflation and inflation expectations. the overall inflation rate has averaged about 3 - 1 / 2 percent over the past four quarters, significantly higher than we would like but much less than the double - digit rates that inflation reached in the mid - 1970s and then again in see energy information administration ( 2002 ). see energy information administration ( 2008a ). 1980. moreover, the increase in inflation has been milder this time – on the order of 1 percentage point over the past year as compared with the 6 percentage point jump that followed the 1973 oil price shock. 4 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, particularly over the longer term. if people expect an increase in inflation to be temporary and do not build it into their longer - term plans for setting wages and prices, then the inflation created by a shock to oil prices will tend to fade relatively quickly. 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. however, changes in long - term inflation expectations have been measured in tenths of a percentage point this time around rather than in whole percentage points, as appeared to be the case in the mid - 1970s. importantly, we see little indication today of the beginnings of a 1970s - style wage - price spiral, in which wages and prices chased each other ever upward. a good deal of economic research has looked at the question of why the inflation response to the oil shock has been relatively muted in the current instance. 5 one factor, which illustrates my point about the adaptability and flexibility of the u. s. economy, is the pronounced decline in the energy intensity of the economy since the 1970s. since 1975, the energy required to produce a given amount of output in the united states has fallen by about half. 6 this 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. this improvement in energy efficiency is one of the reasons why a given increase in crude oil prices does less damage to the u. s. economy today than it did in the 1970s. another reason is the performance of monetary policy. the federal reserve and other central banks have learned the lessons