Bernanke just blew two big holes in sequester debate
The Fed chairman made a simple argument -- the cuts are ill-timed in the middle of a sluggish recovery.
Federal Reserve Chairman Ben Bernanke just blew two big holes in the political argument about the $85 billion in automatic across-the-board spending cuts slated to begin this Friday.
Testifying before the Senate Banking Committee morning, Bernanke made a simple argument: The sequestration cuts are ill-timed in the middle of a sluggish recovery and changing the composition of those cuts does little to mute their overall drag on the economy.
"It was done to be 'Dr. Strangelove,'" said Bernanke, referring to the Stanley Kubrick film about mutually assured nuclear destruction.
All of this matters because the political debate has largely been about cuts to the programs, not the timing of those cuts. President Obama has warned of teachers and civilian Pentagon employees being fired -- a danger he'll repeat in a speech this afternoon at a shipyard in Newport News, Va. Obama has suggested that revenue increases from eliminating tax breaks on wealthier Americans and closing loopholes on companies should replace some of the cuts. GOP congressmen say the tax hikes would choke off growth.
Either way, it's just shuffling numbers across the federal ledger, Bernanke essentially said. The economy would still suffer a projected 0.6% hit to gross domestic product.
"The near-term effect on growth would probably not be substantially different," Bernanke said. "It would be about the same." On Tuesday, Bernanke said it's the difference between a tottering 2% economic uptick and a more robust 2.6% increase that would in theory ramp up hiring.
In an era of staggering gridlock, the Fed chairman's framework for explaining the policies outside his realm -- those set by Congress and Obama -- have been remarkably prescient.
For the better part of the past two years, Bernanke has warned Congress about how their policies have injured growth. The Fed chairman popularized the term "fiscal cliff" in testimony last year, the metaphor that defined the political struggle over tax rates at the end of last year by the White House and Capitol Hill.
The Fed Chairman's testimony also dwelled on financial regulation, the Fed's huge balance sheet, inflation risks, and a 30,000-foot perspective on the global economy. Yet those issues pale, for the moment, in comparison to the economic difficulties caused by the recent political stalemate.
Bernanke can't and doesn't tell Congress what fiscal policies to adopt, but he has noted how the gridlock has undermined the Fed's low interest rates and attempts at monetary stimulus. His line of thinking is that stronger economic growth produces more jobs and income -- which in turn lead to more revenues and less demand on government social programs. Our fiscal and monetary policy should be working in concert.
All told, government policies to reduce the deficit this year are forecast to hurt growth by 1.5%. This includes spending reductions besides the sequester, the end of the two-year payroll tax holiday, the 3.8% investment tax on high income earners, and to a lesser extent the fiscal cliff compromise that charges higher tax rates on household incomes above $450,000.
The Fed cannot offset that hit to the economy, Bernanke said this morning.
The flaw in the urgency to cut the deficit is that it stifles growth and the real deficit problems mount exponentially after 2022, when the Baby Boomer generation segues onto Medicare and Social Security, causing entitlement expenses to surge.
"To some extent, the fiscal policy decisions being made are mismatched with the timing of the problem," Bernanke said.
Josh Boak is a National Correspondent at The Fiscal Times. Subscribe to The Fiscal Times' FREE newsletter.
More from The Fiscal Times
Wow, if it's such a bad idea, why did Obama come up with it? I mean, he's got a cabinet and he's got good ol' Ben there advising him. Why did he come up with this proposal if it was going to make the world start spinning backwards?
They just spent $60 billion on hurricane Sandy aid...
Obama's cabinet is in charge of what and where things get cut, there are a lot of low impact departments and programs that could be put on hold, not the critical services he keeps bellowing about.
Obama's frustrated by the republican house and he'll be pulling all the stops in electing a democratic congress so he can have free REIGN for his last two years.
Think Health care was jammed through?
I'd hate to see what's next in store if they do get control again.
The end will justify the means, say what it takes to get elected - then do what you want afterward.
This is not a hit to the economy, it is a shot in the arm! We reduce GOVERNMENT that produces no growth, profit or sustainable demand, and replace it with PRIVATE sector spending, which produces products people are WILLING to buy, creates real demand (read JOBS) and real profits and growth!
The main difference is the MONEY that people earn is spent by those that earn it rather than being seized from them to distribute to the leech class...
The more we cut from government the BETTER off the economy and MIDDLE CLASS will be.
Let this 85 billion be the first of 850 billion! If we slash 850 Billion we will be where we were when the imbecile Obama took office!
Bernanke still does not understand economics. Nor do any of the so called economic leaders and advisers out there.
Basically even Hitler understood economy much much better than anyone today. He was facing hyperinflation and in response kicked the Wall Street Bankers out of his country and put everyone back to work and go his economy turned around in like 2 years as he was elected in 1934 I think and in 1936 got an economic award from the other countries of Europe for turning the German Economy around.
Pretty Bernanke is merely resupplying our Wall Street bankers with more money which only makes matters worse and does nothing for the working class.
Gee Bernanke monetary policy had nothing to do with getting us out of the Great Depression.
Hitler saved us from the Great Depression by forcing our Wall Street bankers to be afraid of their lives and opening up their pocket books and taking men out of soup lines and putting them in assembly line building war machines to take out Hitler. It was the hiring of tens of millions of unemployed Americans and under employed Americans in factories across America and growing food for the war effect and machines for the war machine that turned the US around.
It was not monetary policy which had us stuck in the Great Depression.
Well it will go down like this! It will be voted down by the House, to protect Boehner and the Senate will approve a deal with the moderates Rep voting for it. McCain, Collin,. Flake and Graham voting for it to save the nation.
Big Ben will print more money and inflation will grow to about 17% over the next few month till they can create another crisis .
Copyright © 2014 Microsoft. All rights reserved.
Investors are anxious to see if hiring can maintain its strong pace in the second half of the year.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.