Friday, March 4, 2011;
IT HAS BEEN just over a decade since then-Federal Reserve Chairman Alan Greenspan uttered these fateful words to a Senate committee: "Should current economic weakness spread beyond what now appears likely, having a tax cut in place may, in fact, do noticeable good." The Fed, of course, is one of the few ostensibly nonpartisan institutions in Washington, and so the partisan advocates of this or that economic measure are perpetually trying to bend its chairman's lapidary pronouncements to their advantage. For advocates of then-President George W. Bush's tax-rate reduction plan, Mr. Greenspan's conditionally supportive words were like gold. They helped ensure its eventual passage - with consequences the U.S. economy is still feeling today.
Not surprisingly, Democrats and Republicans seek to enlist today's Fed chairman, Ben S. Bernanke, to their respective causes - especially when it comes to the sensitive choice between deficit reduction and economic stimulus. For the most part, Mr. Bernanke has quite appropriately tried to avoid taking sides, while warning, equally appropriately, that at some point Congress and the president are going to have to tackle the country's long-term fiscal predicament in earnest.
Mr. Bernanke's testimony before a Senate committee on Tuesday was a case in point. Republicans rejoiced when Mr. Bernanke, plausibly in our view, disputed a recent Goldman Sachs report estimating that the House Republicans' proposed $61 billion spending cut would slice two percentage points off the nation's economic growth rate. Too big an effect from such a small cut, Mr. Bernanke observed. Sensing the political danger in that, Democratic Sen. Charles E. Schumer (N.Y.) cross-examined Mr. Bernanke until he got the chairman to admit that "too much" budget-cutting "too soon" could stall the recovery - as if anyone favors "too much."
And then the curtain came down on this little Kabuki scene. The Fed is always at risk of being politicized, in part because of its dual mandate to fight inflation and maximize employment. Usually this is thought of as a problem for the central bank and its chairman, and it is: Mr. Bernanke must be careful not to get drawn into short-term political arguments lest he damage the Fed's credibility as an independent monetary authority. But his task can be more or less difficult. And members of Congress could, if they chose, do a lot to help.
Here's a thought: Congress could stop asking Mr. Bernanke to referee its disputes on fiscal policy and other matters about which he obviously should not comment publicly. No more games of gotcha about tax increases or spending cuts; no more loaded questions about dealing with China. In short, give the man a break. Yes, members of Congress have a legitimate interest in probing Mr. Bernanke about matters within the Fed's purview. But the public as a whole has a stronger interest in preserving the Fed's political independence, both actual and perceived.