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Class Is In Session

‘s article Bernanke’s Welcome Lecture On Austerity Economics  in the New Yorker provides an excellent summation of the Chairman’s February 26, 2013 report to the Senate Banking Committee. 
He points out that, as the report was delivered on the eve of the eighty-five billion dollars of across-the-board spending cuts due to take affect in a few days under the sequester deal, aside from  monetary policy, Chairman Bernanke also spent considerable time discussing fiscal policy, the bailiwick of the Congress.

Prosperity Not Austerity

In brief, the Chairman warned the congress that allowing the sequester to transpire would endanger the economic recovery while doing nothing to substantially reduce the national debt. Just the opposite – indiscriminate cuts could actually interfere with deficit reduction:

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:

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.