You’re doing it wrong!
That was the gist of Federal Reserve Chairman Ben Bernanke’s opening statement in front of the Congressional Joint Economic Committee on Wednesday morning. The Fed is doing its job, but Congress and the White House are being counterproductive.
The economy is moving in the right direction, but not fast enough for anyone’s liking. Asset prices are getting a nice lift—in part from the underlying performance of the economy and in part from the Federal Reserve’s easy money policies. The stock market is at all-time high, auto companies are ramping up production, and home sales are recovering nicely. The National Association of Realtors reported on Wednesday that existing home sales rose 9.7 percent in April from last year. The median price for a home sold in April 2013 was up 11 percent from April 2012. The combination of rising values and consistent mortgage payments means that, with each passing week, more Americans are above water in their mortgages—i.e., they owe less than their homes are worth. And when people have equity in their homes, all sorts of good things happen. They’re able to sell homes and move. They’re more likely to stay current on their mortgage. And as Home Depot noted in a conference call, in which executives discussed the firm’s bang-up quarterly-earnings report, above-water homeowners are much more likely to spend money on home improvements.
While noting the positive developments, Bernanke said the economy is still sort of meh. So what’s the problem? In a word: government. I’ve noted that we are living in a Golden Age of Deficit Reduction™—the combination of higher taxes, the end of the payroll-tax holiday, the sequester, and growth are helping to bring down the deficit rapidly. The Congressional Budget Office now projects the fiscal 2013 deficit will be $642 billion, down $441 billion, or 41 percent from $1.089 trillion in fiscal 2012. That’s huge. But it may be too much, too soon.
Indeed, Bernanke complained that fiscal policy was dampening growth. First, for the last few years, state and local governments, which have to balance budgets every year, have been hacking spending and employment. “Notably, over the past four years, state and local governments have cut civilian government employment by roughly 700,000 jobs, and total government employment has fallen by more than 800,000 jobs over the same period,” Bernanke noted. I’ve dubbed this the “conservative recovery,” since all the jobs growth has come from the private sector. That’s not how it usually goes, even when Republicans are in the White House. Bernanke: “For comparison, over the four years following the trough of the 2001 recession, total government employment rose by more than 500,000 jobs.”
Now that states are doing much better, with many sporting surpluses, the job carnage is ending. But if it’s not one thing, it’s another. While states may be loosening up, Bernanke noted, “at the same time, though, fiscal policy at the federal level has become significantly more restrictive. In particular, the expiration of the payroll-tax cut, the enactment of tax increases, the effects of the budget caps on discretionary spending, the onset of the sequestration, and the declines in defense spending for overseas military operations are expected, collectively, to exert a substantial drag on the economy this year.” How much? Bernanke noted that “the deficit-reduction policies in current law will slow the pace of real GDP growth by about 1 1/2 percentage points during 2013, relative to what it would have been otherwise.” That doesn’t sound like much. But 1.5 percent of GDP represents more than $200 billion in economic activity.
Congress, of course, is the main culprit here. But the White House is complicit as well.
Congress, of course, is the main culprit here. But the White House is complicit as well. So too are the professional deficit hawks, who, having failed to encourage a grand bargain, continue to advocate for more cuts in the face of massive deficit reduction. Bernanke suggested that Congress ease up on the whole budget-cutting thing. The U.S. still has long-term issues, Bernanke noted, but that’s no reason to let the sequester continue. To boost short-term growth and ward off giant long-term deficits, “the Congress and the administration could consider replacing some of the near-term fiscal restraint now in law with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run.”
Of course, that’s not going to happen. In fact, we’re going to get more of the same. Meanwhile, Republicans are showing no signs of relenting. “House GOP Panel Approves agency Budget Cuts Far Deeper Than Those Approved in March,” reads the headline on an Associated Press article Wednesday morning, detailing House Republicans’ desire to slash federal spending further.
Bernanke’s term expires in January. It’s widely thought that he’ll go back to Princeton, and make way for a new head, most likely Vice Chairman Janet Yellen. When asked at the hearing if he was interested in another term, Bernanke demurred. And who can blame him? Think about the Fed and the rest of official D.C. (the White House, Congress, the conventional-wisdom peanut gallery) like two horses pulling a plow. In 2008 and 2009, they were working in concert, each shouldering an equal burden. For the last few years, Bernanke and the Fed have plodded along. But the other horse stopped working in late 2009, and then in 2010 unhitched himself from the harness, went to the back of the plow, rehitched himself up, and started galloping in the opposite direction. If you had to work under those conditions, you’d be more than ready to go out to pasture.