Federal Reserve Chairman Ben Bernanke Thoughts on the Economy Make Great Sense

Posted: February 28, 2013 in Commentary, Economics, Politics
Tags: , , ,

Fed Chairman Bernanke gave his semi-annual report to Congress on the state of the economy on February 26-27th. He had a number of very interesting things to say. First of all he pointed out that “significant progress has been made recently toward reducing the federal budget deficit over the next few years. The projections released earlier this month by the Congressional Budget Office (CBO) indicate that, under current law, the federal deficit will narrow from 7 percent of GDP last year to 2-1/2 percent in fiscal year 2015.”  This means that we are already on the right track toward reducing the federal deficit. Are we all the way there yet? No. However, as Bernanke also pointed out, the job market remains weak. He noted in particular that “About 4.7 million of the unemployed have been without a job for six months or more, and millions more would like full-time employment but are able to find only part-time work. High unemployment has substantial costs, including not only the hardship faced by the unemployed and their families, but also the harm done to the vitality and productive potential of our economy as a whole. Lengthy periods of unemployment and underemployment can erode workers’ skills and attachment to the labor force or prevent young people from gaining skills and experience in the first place–developments that could significantly reduce their productivity and earnings in the longer term. The loss of output and earnings associated with high unemployment also reduces government revenues and increases spending, thereby leading to larger deficits and higher levels of debt.

Bernanke expressed concern about the automatic spending sequestration scheduled to begin tomorrow.  He cited CBO’s estimates that indicated that sequestration will slow economic growth by about 0.6 percentage point this year. According to Bernanke, “Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant. Moreover, besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run for any given set of fiscal actions.”

In his testimony, Bernanke stated that while the sizes of deficits and debt matter, “not all tax and spending programs are created equal with respect to their effects on the economy. To the greatest extent possible, in their efforts to achieve sound public finances, fiscal policymakers should not lose sight of the need for federal tax and spending policies that increase incentives to work and save, encourage investments in workforce skills, advance private capital formation, promote research and development, and provide necessary and productive public infrastructure. (emphasis added) Although economic growth alone cannot eliminate federal budget imbalances, in either the short or longer term, a more rapidly expanding economic pie will ease the difficult choices we face.”

Bernanke’s testimony makes it clear that the Fed Chairman believes that the cuts that are coming as a result of sequestration will do significant harm to a still vulnerable economy. He understands (unlike the Radical Republicans in Congress) that any deficit reduction must combine both increased taxes and spending cuts. As important, he understands that cuts to programs that are investments in our future growth (education, R&D, public infrastructure) are pennywise but pound foolish.

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