Ben S. Bernanke went to Congress on Tuesday with a message: Cut out the brinkmanship over tax and spending policy and slash budget deficits more than planned — but don’t do it so fast that it undermines economic growth.
In making this unusually explicit push, the Federal Reserve chairman told lawmakers that the increasingly likely scenario — that they do nothing to put the nation’s finances on a sound footing and let the nation lurch from crisis to crisis — is not an acceptable option.
Bernanke’s remarks came as Congress and the Obama administration are facing a stalemate over how to handle the government purse.
Republicans have rejected President Obama’s $447 billion proposal to promote job creation but have shown openness to some elements of it. Meanwhile, the congressional “supercommittee” held a pair of hour-long sessions Tuesday as part of its mission to produce a bipartisan plan for reducing the national debt. So far, that panel has shown no outward signs of progress.
With his strong words, Bernanke reinserted himself into the roiling political debate over the nation’s fiscal policy — at a time when he is already under fire from some Republican presidential candidates, among others, who say he has overplayed his hand as Fed chairman. Some critics have faulted Bernanke and the Fed for taking steps to stimulate the sagging recovery on the grounds that these steps could instead hurt the economy.
Amid a gloomy outlook for economic growth, Bernanke warned that the recovery is “close to faltering,” and he said the central bank has adjusted its forecasts downward since they were last released publicly in June.
The Fed decided two weeks ago to shift the kind of Treasury bonds it buys from short-term instruments to long-term debt in a bid to lower longer-term interest rates and encourage economic growth. While Bernanke did not signal that any further steps were imminent, he did say that the Fed is “prepared to take further action as appropriate” to encourage the recovery, suggesting that the central bank could act if growth slows further.
Reflecting this economic uncertainty, financial markets have been exceptionally volatile.
The stock market was down sharply for most of the trading day on Tuesday. But in the final minutes, a news report that European Union leaders were considering a plan to strengthen European banks prompted a sharp rebound, with the Standard & Poor’s 500-stock index rising 4 percent from 3:15 p.m. to the 4 p.m. closing time, finishing the day up 2.2 percent.
Wild swings on the stock market have been particularly common since late July. Bernanke attributed them in large part to political uncertainty, both in Europe and the United States. A bitter standoff this summer between Republicans and Democrats over whether to raise the government’s borrowing limit raised the prospect of a national default.
“The brinksmanship of the summer and at least perception in the minds of some investors that the United States might actively consider defaulting on its debt. . . . I think was a negative for the financial markets,” Bernanke told the Joint Economic Committee. “It’s no way to run a railroad.”
There was another round of legislative chicken last week, with the House ultimately approving a temporary funding measure Tuesday.
After five weeks, the supercommittee has made little headway in breaking the partisan gridlock over taxes and entitlement spending that prevented Obama and House Speaker John A. Boehner (R-Ohio) from achieving a “grand bargain” in late July. While Republicans may be willing to end some minor corporate tax breaks, such as an accelerated write-off for corporate jets, key lawmakers and senior aides said neither party has so far demonstrated an appetite for compromise sufficient to produce a significant proposal to tame future borrowing.
Bernanke stressed that the U.S. fiscal situation is “clearly not on a sustainable path at present,” and added that the deficit reductions the supercommittee is charged with achieving — at least $1.2 trillion over the coming decade — would not alone make the government’s finances sustainable.
One supercommittee member, Rep. Chris Van Hollen (D-Md.), said Bernanke’s warning “underscores the urgency of focusing on jobs and getting the economy moving again along with long-term deficit reduction.”
Fresh stimulus “remains a priority for Democrats,” Van Hollen said, “and we look forward to continuing the discussion.”
Congressional action to stimulate the economy in the short term appears unlikely. While lawmakers are poised to take action on three long-stalled trade bills that Obama finally sent to Congress on Monday, Democrats and Republicans are bickering over what else to do about the sluggish economy, with Republicans adamantly opposed to any fresh government spending.
House Majority Leader Eric Cantor (R-Va.) this week pronounced Obama’s latest jobs package dead. And on Tuesday, Senate Minority Leader Mitch McConnell (R-Ky.) derided it as “Stimulus 2” and dared Senate Democrats to stage a vote on it.
Public opinion appears to be at the president’s back on the plan. A new Washington Post-ABC News poll conducted Sept. 29 to Oct. 2 shows that 52 percent of Americans support the president’s jobs plan, compared with 36 percent who oppose it. And about 64 percent of those surveyed favored reducing the budget deficit through a mix of spending cuts and tax increases, compared with 31 percent who preferred exclusively spending cuts and 3 percent who preferred exclusively tax increases.
But even many Democrats in Congress have publicly opposed the measure, largely because of Obama’s proposal to cover the cost by raising taxes for businesses, oil and gas companies, and high-earning families. Senate Democratic leaders hope to replace those tax increases with a surtax on the super-rich modeled after Obama’s “Buffett rule,” which is substantially more popular. But until they rework the package, Obama’s demands that Congress pass the bill “now” are falling on deaf ears even in his own party.
“It’s clear that we need a full debate on this,” Senate Majority Leader Harry M. Reid (D-Nev.) said Tuesday. “And that time will come very, very soon.”
Senior Republicans are considering extending the current payroll tax holiday past its Dec. 31 expiration date, on the theory that it would be harmful to raise anyone’s taxes when the economy is so weak — and that it would make for bad politics in an election year. A one-year extension would reduce revenue by a little more than $100 billion, opening the door for Republicans to acquiesce to Democratic demands to end some tax breaks for corporations without violating a pledge to avoid raising tax revenue overall.
However, GOP leaders remain adamantly opposed to any significant hike in tax rates or revenue. Without fresh revenue, aides said it would be almost impossible to put together a debt-reduction package significantly larger than $1.2 trillion.