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.
The Chairman’s recommendations to the Congress?
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. 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.
In other words, the economy is still expanding but, as Cassidy puts it, austerity policies risk “making the same mistake that F.D.R.’s Administration made in 1937, when it brought on another recession:”
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.
The austerity hounds in Congress are not used to being corrected so bluntly, and politics seems to leave little room for macroeconomic realities.
The Truth? You Can’t Handle The Truth
Nonetheless, Chairman Bernanke remained focused on the need to bring down unemployment, the main justification for the Fed’s expansionary policies. He explained that high unemployment “has substantial costs…to the vitality and productive potential of our economy” including:
- Hardship faced by the unemployed and their families
- Erosion of workers’ skills
- Significant reduction of long-term productivity and earnings
- Loss of output and earnings
- Reduced government revenues
- Increased government spending
- Larger deficits and higher levels of debt
For engaging in the capital crime of truth telling, Chairman Bernanke has been vilified by the extreme right of “debasing the currency, confiscating the savings of the elderly, and generally being engaged in some quasi-socialist plot to undermine the Republic.” Cassidy sums it up nicely: