Bernanke: Conservative Voice of Reason to Crazy Fellow Republicans

John Cassidy at The New Yorker:

With about eighty-five billion dollars of across the board spending cuts due to take affect in a few days, Fed chairman and former Princeton prof Ben Bernanke was up on Capitol Hill this morning giving his fellow Republicans a much-needed lesson in austerity economics. Departing from his statutory duty of reporting to the Senate Banking Committee on the Fed’s monetary policy, Bernanke devoted much of his testimony to fiscal policy, warning his congressional class that letting the sequester go ahead would endanger the economic recovery and do little or nothing to reduce the country’s debt burden.

“Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant,” Bernanke told his students, who included a number of right-wing Republican diehards, such as Senator Bob Corker, of Tennessee, and Patrick Toomey, of Pennsylvania. “Moreover, besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run.”

Translated from Fed-speak, that meant that congressional Republicans have got things upside down. Bernanke has warned before about the dangers of excessive short-term spending cuts. But this was his most blunt assertion yet that Mitch McConnell, John Boehner, et al. should change course. “To address both the near- and longer-term issues, the Congress and the Administration should consider replacing the sharp, frontloaded spending cuts required by the sequestration with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run,” Bernanke said. “Such an approach could lessen the near-term fiscal headwinds facing the recovery while more effectively addressing the longer-term imbalances in the federal budget.”


As someone who has criticized the Fed chairman in the past for his role in helping to pump up the housing bubble, and for being tardy about addressing renewed weakness in the economy early last year, let me give praise where it is due. Not just today, but on numerous occasions in recent months, Bernanke has shown the willingness to tell members of his own party things they don’t want to hear. In refusing to embrace the mindless anti-government rhetoric and antediluvian economic theorizing that passes for policy analysis in much of today’s G.O.P., he has performed a valuable public service. Of course, his warnings are likely to be ignored, but that is beside the point. Bernanke has done his bit for sanity and reason.

The supporting documents that he presented to the committee showed that the Fed believes the economy, despite a pause in the fourth quarter of 2012, is still expanding at a fair pace. However, he and some of his colleagues are worried that by embracing austerity policies, Congress and the White House might be making the same mistake that F.D.R.’s Administration made in 1937, when it brought on another recession. During the question-and-answer session, Bernanke repeated his warning that the Fed was powerless to offset the hit to the economy from the combined effects of tax increases and spending cuts, which he said could well reduce economic growth this year by about one and a half per cent of G.D.P. “There is a sense in which monetary and fiscal policy are operating at cross purposes,” he said. “The (deficit) problem is a long-term problem and should be addressed over a longer time frame.”

While the Fed chairman’s warning about the futility of Republican policy appears unlikely to be heeded, it enhances his reputation as a straight shooter. With just eleven months to go before his second term is up, and with reports saying he doesn’t want to be renominated, he has evidently decided to say what he thinks and be damned. Not only did he put pressure on G.O.P. leaders to compromise in the dispute over the sequester; he also called on European countries to ease up on their austerity policies, saying that they could adopt a “more judicious balance” of short-term and long-term fiscal consolidation.

Not surprisingly, the experience of being instructed by George W. Bush’s former chief economic adviser didn’t go down well in some quarters. Corker, a former builder who is a long-time critic of Bernanke’s expansionary policies, called him “the biggest dove since World War Two.” Toomey, a former head of the conservative lobbying group Club for Growth, questioned whether the sequester would have any real impact on the economy. Bernanke shrugged off the criticisms, calmly and methodically laying out the realities of the situation.

During the past few years, he pointed out, important advances have already been made in stabilizing public finances, with the Congressional Budget Office currently forecasting that by 2015 the budget deficit will be just two-and-a-half per cent of G.D.P. (In 2009, it was ten per cent.) While this was a positive development, he added, “a substantial portion of the recent progress…has been concentrated in near-term budget changes, which, taken together, could create a significant headwind for the economic recovery.” While the Fed’s unorthodox monetary policies could give the economy some support—in an effort to bring down interest rates, it is purchasing tens of billion of bonds every month—“I don’t think they can offset the one-and-a-half per cent of fiscal restraint we are seeing this year,” Bernanke explained. Therefore, much depends on Congress.

If most of this was merely what any adequate macroeconomics textbook will tell you—tax and spending policies have a big impact on the economy; monetary and fiscal policies work best in concert—it was a message that needed restating loudly and clearly. Bernanke did just that, and he stressed the pressing need to bring down unemployment, particularly long-term unemployment, which is the main justification for the Fed’s expansionary policies:

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.

Again, this isn’t a new argument to economists. Going back to the nineteen-thirties and nineteen-forties, Keynes and many of his followers were fully aware of how high unemployment, in addition to being a human disaster, degraded an economy’s long-term productive potential. During the nineteen-eighties, this destructive process was given a fancy name—“hysteresis”—and applied to Europe. Now it is threatening the U.S.—a fact Bernanke that has recently been busy pointing out. He has stuck with the message despite the fact that many people on the ultra-right are accusing him of debasing the currency, confiscating the savings of the elderly, and generally being engaged in some quasi-socialist plot to undermine the Republic. For any Fed chairman worth his salt, such criticisms are part of the job. Today, once again, the mild-mannered professor demonstrated that he can take the heat.