On the eve of draconian budget cuts known as the sequester comes Federal Reserve Chair Ben Bernanke's semi-annual Congressional testimony along with an accompanying Monetary Policy Report. Contained within is some economic sanity shared by most economists on what < href="http://www.economicpopulist.org/content/sequestration-suicide">sequestration is really going to do.
A substantial portion of the recent progress in lowering the deficit has been concentrated in near-term budget changes, which, taken together, could create a significant headwind for the economic recovery. The CBO estimates that deficit-reduction policies in current law will slow the pace of real GDP growth by about 1-1/2 percentage points this year, relative to what it would have been otherwise. A significant portion of this effect is related to the automatic spending sequestration that is scheduled to begin on March 1, which, according to the CBO's estimates, will contribute about 0.6 percentage point to the fiscal drag on economic growth this year. 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 for any given set of fiscal actions.
Contrast that with the House Financial Services Committee Chair's opening statement. Chair Hensarling is so off mark, it is like he is on another planet. Hensarling rails against inflation, when there is none and claims many economists agree (when in fact they do not), that the Federal Reserve is in the outer limits with their policies. Yes, he is referencing the 1950's Science Fiction TV show. He even claims millions of Americans are not impressed with the Fed's results, as if the Federal Reserve can enact policies, to get people back to work. It is Congress who are derelict in their duties and only Congress and this administration control policies and laws which could get people back to work and generate jobs. If these ramblings of economic fiction were not enough, Hensarling then claims today's economic problems are a fiscal one which is just outright wrong. The entire opening statement would be laughable if it were not for the fact Jeb Hensarling is the Chair of an important financial Congressional committee. Over and over again Republicans try to claim the economic problems are fiscal or just too much government spending, when anyone who knows the least thing about economics recognizes America has a demand problem as well as an ongoing jobs crisis.
Bernanke, on the other hand, knows there is an employment crisis in America:
The job market remains generally weak, with the unemployment rate well above its longer-run normal level. About 4.7 million of the unemployed have been without a job for six months or more, and millions more would like full-time employment but are able to find only part-time work. High unemployment has substantial costs, including not only the hardship faced by the unemployed and their families, but also the harm done to the vitality and productive potential of our economy as a whole. Lengthy periods of unemployment and underemployment can erode workers' skills and attachment to the labor force or prevent young people from gaining skills and experience in the first place--developments that could significantly reduce their productivity and earnings in the longer term. The loss of output and earnings associated with high unemployment also reduces government revenues and increases spending, thereby leading to larger deficits and higher levels of debt.
Bernanke doesn't see the jobs crisis ending anytime soon either. Congressman Michael Fitzpatrick asked the question how long will the unemployment rate say above 6%. Bernanke said three more years! That's an entire decade of a jobs crisis, much of it caused by Congress's refusal to put Americans first for jobs and making jobs job #1 in Congress.
During the Q&A, Republican Senator Manchin was trying to browbeat the Federal Reserve Chair, insisting the budget deficit is the biggest threat to the economy, when Beranke knows it is not. In one answer Bernanke compared sequestration to Dr. Strangelove, or How I Stopped Worrying and Loved the Bomb. If anyone knows this famous film, that about describes Congress, their behavior and their insistence on mutually assured economic destruction by continually demanding short term budget cuts..
Manchin: But I mean, it would be irresponsible for us not to do something. We have two alternatives, two paths to take here. Either fix the financial problems in a longer-term, bigger fix or do something with sequestering that we’ve punished ourselves basically because we have been unable, as a body, to come together.
So I think that was also said, if we’re going to do a sequestering, shouldn’t it also be done in a more or a smarter way to where there’s more flexibility?
Bernanke: Well, as you point out, it was done to be sort of like, in “Dr. Strangelove,” the bomb that goes off.
So if — obviously if you can find a way to, you know, a bipartisan way to make it more effective and —and — and better prioritize, that would be a good thing.
And people disagree on the second point but, again, what I suggested today is try to make some trade-off on the effects of the near-term recovery and, you know, aligning the policy with the timing. The timing says that you’ve made progress on the very near-term as far as the budget is concerned.
Where — where the problem still remains unaddressed is — is in the longer term. And so it doesn’t quite match to be doing tough policies today when the real problem is a somewhat longer-term problem.
There were a few Congessional representatives asking questions which implied they do know a thing or two about the economy. Congressman Himes asked Bernanke about European austerity measures, which the GOP is determined to enact in America. Bernanke confirmed austerity does not work. From the latest European economic indicators, it is very obvious austerity hurts economic growth so much economies cannot recover at all from them, never mind the suffering it causes to the citizens of the nation. .
Republicans pounded on Bernanke like bad students hopelessly lost in an undergraduate economics class. Like soon to be Freshman flunk outs, they stand arguing with the Professor over their course F grade instead of realizing they don't know what they are talking about. If you want to see how economically illiterate some in Congress are, look no further than the below exchange between Wisconsin Congressman Sean Duffy and Bernanke on spending. Duffy clearly doesn't know the difference between waste, which is trivial in volume in comparison to the sequestration cuts, and government spending which stimulates economic growth, generates jobs and provides vital services for the people and private sector. This is what we are dealing with for budget policy and it's no surprise with this lack of even basic economics 101 comprehension, why America is in such trouble today.
Watching these two days of Federal Reserve hearings one comes to the realization the inmates are running the asylum. Unfortunately this is not a Stanley Kubrick film, it's real, it is our Congress and America is in very big trouble as a result.