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November 20, 2012

Bernanke: Economy Still Weak, No Time for Austerity

Posted in: Uncategorized

Ben Bernanke’s speech on the economy today offered no new information. It was more of an overview on the state of the economy, and it hit on many very familiar themes which Bernanke has expressed for a long time now, including the need to loosen lending standards in a type of reinflation of the housing bubble, which infuriates me. But give Bernanke credit for actually depicting the economy as it is rather than as someone hopes it to be; a weak economy with troublingly high unemployment. In other words, the wrong time to engage in a fiscal cutback through austerity.

All you need to know is this quote: “The consensus among my colleagues on the FOMC is that the unemployment rate is still well above its longer-run sustainable level, perhaps by 2 to 2-1/2 percentage points or so.” That sets out a long-run normal unemployment level at around 5.5-6%, which still sounds a bit high for my taste. But it basically expresses the position that policymakers have failed, because four years after the Great Recession, unemployment remains that elevated. I know about all the charts showing the relative success of the United States when paired both against other industrialized economies and against the standard set by other countries gripped by financial crises. But the reason that most countries are so slow to bounce back from financial crises has a lot to do with their own bad policies undertaken as a response. Just because the US has employed marginally less bad policies doesn’t mean that we should declare victory.

As an example, take a look at this statistic:

Although many of these consumers are on better financial footing and optimistic about their economic future this year, the holidays are still a source of stress and strain on their precarious finances, Think Finance said in the poll.

Some 45 percent of those polled said the holiday season brings so much financial pressure, they would prefer to skip it altogether. Almost half said their level of stress related to holiday expenses is high or extremely high.

That’s probably because nearly the same amount — some 45 percent — say they do not expect to have enough money set aside to cover holiday expenses.

That’s actually better than last year, when 45% of the country does not have the money for holiday expenses, there’s an underlying problem of weakness.

Bernanke will continue the monetary easing undertaken as a response to a weak economy, and may employ more direct forward guidance, as intimated by the identification of the preferred level of unemployment here. But even with these items baked in, the prospects for the economy in 2013 include growth too weak to bring down that unemployment rate. That’s in part due to the failure of fiscal policy, which Bernanke signals here:

Although fiscal policy at the federal level was quite expansionary during the recession and early in the recovery, as the recovery proceeded, the support provided for the economy by federal fiscal actions was increasingly offset by the adverse effects of tight budget conditions for state and local governments. In response to a large and sustained decline in their tax revenues, state and local governments have cut about 600,000 jobs on net since the third quarter of 2008 while reducing real expenditures for infrastructure projects by 20 percent.

More recently, the situation has to some extent reversed: The drag on economic growth from state and local fiscal policy has diminished as revenues have improved, easing the pressures for further spending cuts or tax increases. In contrast, the phasing-out of earlier stimulus programs and policy actions to reduce the federal budget deficit have led federal fiscal policy to begin restraining GDP growth. Indeed, under almost any plausible scenario, next year the drag from federal fiscal policy on GDP growth will outweigh the positive effects on growth from fiscal expansion at the state and local level [...] Even as fiscal policymakers address the urgent issue of longer-run fiscal sustainability, they should not ignore a second key objective: to avoid unnecessarily adding to the headwinds that are already holding back the economic recovery.

Bernanke’s what I like to call a soft fiscal hawk: he prefers the barbell approach, with no fiscal tightening in the near term (I don’t think he’s gone so far as to call for fiscal stimulus) with real tightening in the long term. The only thing I’ll grant him is the honesty to say that austerity at this time would be crippling.


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