Once Again, I Gotta Give Ben His Props

February 8th, 2012 at 8:05 am

I thought Federal Reserve chair Ben Bernanke once again showed some mettle in these remarks to the Senate Budget Committee on the economic outlook.   He’s not at all swept up in optimism about recent improvements—he’s particularly on point regarding continued weaknesses in the job market—and he clearly cites all the reasons to keep pressing on monetary stimulus.

One note on taxes, because this came up on Larry Kudlow’s show last night.  Ben correctly warned, based on the same type of analysis I show here, that the fiscal drag from the tax increases under current law—full Bush sunset, AMT hits a lot more people—would be too much for a still weak economy to absorb in 2013.

As the WaPo put it:

…the Fed chief continued to stress that a sharp, immediate push to reduce the deficit could harm the recovery in the upcoming months. In January 2013, he pointed out, the George W. Bush tax cuts will expire, and the major spending cuts triggered by the Budget Control Act will take effect, absent any further action by Congress. As a result, “there will be sharp change in fiscal stance of the federal government. Without compensating action, it would indeed slow the recovery,” Bernanke told the committee members.

I think Bernanke knows he’s operating from a playbook where the Fed is the only game in town in terms of stimulus.  The economy still needs a boost—he called the pace of recovery “frustratingly slow”—but he knows Congress will be MIA for the indefinite future, and that means little new fiscal stimulus will be forthcoming.

That doesn’t mean, as my buddy Larry K suggested, that Ben is some kind of supply-sider who believes any tax increase will tank the economy.   He’s got perfectly legit street cred on the need for balanced deficit reduction, and he understands that new revenues will have to be part of that deal.

The issue here is, of course, timing, and the 2.5% of GDP fiscal drag in 2013 (Zandi’s number) embedded in current law is way too much for what will still be a recovering economy.   The highend cuts should definitely expire on schedule, but the rest should be phased out as things improve.

So, as I’ve said before, nobody’s perfect, but Bernanke is doing great work.  I like the aggressiveness, the creativity (the use of their balance sheet while their main tool–the benchmark interest rate–is bound by zero), the transparency and signalling, the clear-eyed assessment of the still-weak economy…I even like the neatly-trimmed beard.

All’s I’m saying Ben, is that if Perry comes after you, I’ve got your back.

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4 comments in reply to "Once Again, I Gotta Give Ben His Props"

  1. Comma1 says:

    I’m sorry, we are on the same side here, but I disagree with you. The time for fixing the situation with mutterings of testimony at Senate committee hearings ended the day after Lehman Brothers collapsed. Bernanke knew it then too. He didn’t respond to the Wall St. welfare crisis by waiting a month to give testimony and give precatory suggestions about what might be useful to help out his buddies. No. He got something done.

    But somehow, near four years into this doom, with a decimated employment situation — no new jobs for a decade, it’s worth repeating , a decade… 10 years, and Bernanke is getting praised for this? Garbage. If he was an employee he would have been fired a long time ago. Shame on you for praising someone who has performed so poorly in the face of such suffering. As far as I can tell history is not going to be praising his beard, history won’t be praising Geithner’s jokes either. I think it much more likely that history will be saying these men presided over the destruction of Western preeminence and the promise of an economic system that included a middle class.



    • Jared Bernstein says:

      You’re right about past mistakes. And I don’t mean to downplay them–they’re very serious and caused major suffering that could have been avoided if he and others had better insights into what was actually going on. But he appears to me to have learned something and you don’t see nearly enough of that from big shots in this field…they tend to think they have it all figured out and when the facts don’t fit the theory, they twist the facts.

  2. Allan Lane says:

    Jared, usually on the left we say there was no Bush boom. If that’s so, we have to ask why the Bush tax cuts were so un-stimulative (at least if we’re some sort of Keynesians). Why wasn’t there a boom? But if they didn’t cause a boom, why would their withdrawal cause much of a bust? Did it all just go to expand the bubble somehow since so much went to the wealthy? I know only enough economics to ask the question, not to answer it. Are some of my assumptions wrong?

  3. Michael says:

    Bernanke’s hit the edge of his ideology’s capacity to deal with reality, and rather than sit and seriously come up with a new ideology that contains the new information he has, he’s flailing ad hoc.

    Because Bernanke is smart and experienced, it’s not terrible. But if one follows Bernanke’s thinking to its logical conclusion, he needs to have the Fed hire a bunch of people to do infrastructure improvements.