Ben Bernanke to Congress: You’re doing it wrong

February 27, 2013

Matt Yglesias notes that there seem to be no serious monetary policy doves in Congress. When Federal Reserve Chairman Ben Bernanke heads to the Hill, he gets either softballs from seemingly disinterested Democrats or tough questions from Republicans who favor tighter monetary policy. 

The toughest real talk, actually, tends to come from Bernanke himself, who uses his occasional visits to the Hill to politely, opaquely scold Congress about their approach to fiscal policy.

Brad already pointed out this doozy from Bernanke's opening:

The CBO estimates that deficit-reduction policies in current law will slow the pace of real GDP growth by about 1-1/2 percentage points this year, relative to what it would have been otherwise.

A significant portion of this effect is related to the automatic spending sequestration that is scheduled to begin on March 1, which, according to the CBO's estimates, will contribute about 0.6 percentage point to the fiscal drag on economic growth this year. 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.

Also amusing was Bernanke's exchange with Sen. Joe Manchin, who really, really, really wanted him to sign onto the idea that the debt is the biggest threat the economy faces:

Manchin: Chairman Bernanke, thank you for being here.

First of all, when I first came to the Senate two and a half years ago, I was on Armed Services Committee, and Admiral Mullen at that time was asked what's the greatest threat the United States faces. And I thought I would hear some military challenge. And he didn't even hesitate by saying that the debt of this nation is our greatest threat.

And I didn't know if you shared that same — that same thought.

Bernanke: It is certainly an important economic risk and I think it's very important that over the longer-term that we develop a sustainable fiscal plan, no question about it.

Manchin: His assessment was it was the greatest threat we faced.

Bernanke: I don't know. There are many — there are many possible candidates for that.

He also tried to disabuse the Senate of the notion that it needs to do something, the sequester is something, and so the sequester is better than nothing:

Manchin: But I mean, it would be irresponsible for us not to do something. We have two alternatives, two paths to take here. Either fix the financial problems in a longer-term, bigger fix or do something with sequestering that we've punished ourselves basically because we have been unable, as a body, to come together.

So I think that was also said, if we're going to do a sequestering, shouldn't it also be done in a more or a smarter way to where there's more flexibility?

Bernanke: Well, as you point out, it was done to be sort of like, in "Dr. Strangelove," the bomb that goes off.

So if — obviously if you can find a way to, you know, a bipartisan way to make it more effective and —and — and better prioritize, that would be a good thing.

And people disagree on the second point but, again, what I suggested today is try to make some trade-off on the effects of the near-term recovery and, you know, aligning the policy with the timing. The timing says that you've made progress on the very near-term as far as the budget is concerned.

Where — where the problem still remains unaddressed is — is in the longer term. And so it doesn't quite match to be doing tough policies today when the real problem is a somewhat longer-term problem.

All of this gets back to Bernanke's belief that fiscal policy is currently harming monetary policy — that to pay off, his efforts to keep rates low need to be matched by a Congress willing to use those low rates to spur economic growth. Bernanke — originally a George W. Bush appointee, by the way — finds some support for that position among the Democrats and none among the Republicans. What he's not finding is anyone saying that given the fact of congressional failure and gridlock, the Federal Reserve should be doing much more than it currently is.

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