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.

By The Fiscal Times Feb 26, 2013 4:41PM
The Fiscal Times logoBy Josh Boak

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.

Federal Reserve Building Hisham Ibrahim CorbisFor 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.

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46Comments
Feb 27, 2013 12:27PM
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Imagine 3% less government. That would be terrible wouldn't in? Just kidding, it would be GREAT!

Feb 27, 2013 10:56AM
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Warakas...I think you are correct...Seems everything that the Administration AND the Congress has been doing for several years;..Is "can-kicking".

As we all know the House, Sponsors, Spends or writes the Checks.

 

Someone or an Elected Group...That covers the Prez, Boehner, Reid; Needs to step to the plate, saying this needs to stop or be changed.?....Nobody really does except for Political rhetoric..

Thus another "kick", plus pointing fingers at one another...Still in the Sand-box stage.

 

Then they "dream up" the Sequester to make them all look like heroes or that they really care about the average American...They "all sign on", until it comes back to bite them on the azz.

SOME OF THE CUTS, or defayed expenses in the Sequester; Even look stupid, but they all signed on anyway...They cut little if anything?? And just aren't going to pay the bills coming DUE.

Feb 27, 2013 8:25AM
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McCain may be right: "Build the dang fence". Just build  it around Washington DC to keep the pols bottled up.
Feb 27, 2013 1:25AM
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When you're saying that you can't cut 85 billion out of a trillion dollar plus deficit, that's the problem. This is still no more than kicking the can down the road. As many posters stated, we just spent 60 billion in unexpected Hurricane Sandy aid and there was little talk of shuttering the doors. Let's get real about this whole thing, The admin. just doesn't want to do it and they'll spend millions trying to stop it. Just like the ACA. Most still don't like it, don't want it, but it's the law of the land. Well, sequestration is also. Congress passed it, BO signed it. If it was so bad, why did they do it?
Feb 27, 2013 12:25AM
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none of it matters - we're all F#$%ED.  everyone would need to actually work together to fix the problem and none of the political and social retards can even agree to stop finger pointing let alone, actually solve a problem.  Only thing that will change things will be a big major disaster, war or economic collapse where we can start over.  they ALL need to be fired.
Feb 26, 2013 11:52PM
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Yes by the way our Government(Congress) calculates their use of Funds...They fully believe, they  should spend their allowances before they get them..

Therefore...They twist it into being a spending cut.

Which in Reality it isn't.

Feb 26, 2013 11:26PM
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Wrong...it is a reduction in the increase in spending, not a spending cut!
Feb 26, 2013 11:08PM
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The so called sequester is $85 billion and he says the country will come to a halt?
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.
It's all politics, campaigning still, and nothing to do with benefiting the nation.
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.

Feb 26, 2013 11:01PM
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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!

Feb 26, 2013 7:57PM
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Of course the timing is bad - when is taking back money previously given a good thing!  How much are we paying this guy and all he can come up with is to borrow more and print more money?  All the administration and Congress can do is complain about each other.  The Government is definitely a 'fine' role model for our children - they are teaching them it is OK to lie, borrow and spend beyond your means, blame others when something does not go their way, and get over on your neighbor every opportunity you can.  
Feb 26, 2013 7:48PM
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almost zero interest rates for savers fo 5 years now. Banks and there CEO's get millions in bonus, for there performances?????? Yet people that need the savings accounts to at least keep pace with inflation for the last 5 years have suffered. Ben has the idea that he can control hyper-inflation when it comes. So did Japan in the 90's look around and see if things are going up in leaps right now. Food. gas, taxes, clothing and the list goes on. Ole Ben has had the last 5 years to prove his zero interest theory and it hasn't helped at all. Still high unemployment, housing barely holding it's own and no new jobs. A first year economist knows you cant spend more than you take in. I think ego is the only thing he has gotten right in a long time.


Feb 26, 2013 7:31PM
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The 1 trillion dollar deficits are ill timed in a sluggish economy.
Feb 26, 2013 7:28PM
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Remember what Pelosi said. "We do not have a spending problem. We only have a revenue problem". Yes, that is our leadership. If we tax the rich 100% we do not come out of this.
Feb 26, 2013 7:24PM
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All I heard was more lies and coverups from this ship sinker!!
Feb 26, 2013 7:12PM
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Ben needs to take a math class.  The feds just sent about $70B to the northeast for hurricane relief.  The current year federal budget went UP by about $15B (after the $85B reduction to take place March 1).  That adds up to a $85B spending increase., not a decrease as some would suggest.  Come on Ben, stop carrying water for Obama. 
Feb 26, 2013 6:51PM
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A fair number of commenters think they are smarter than Bernanke.  I doubt it.  In fact, there is a lot of proof that the Tea Party and the other right-wingers do not know squat.
Feb 26, 2013 6:25PM
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My understanding is if we dont make some reduction of debt, we will be downgraded again.
Feb 26, 2013 6:07PM
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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 .

Feb 26, 2013 6:06PM
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The problem will be how the public, bankers and investors react to the cuts.  No one is exactly sure where the real cuts will happen and the economic results of the cuts.  Looks like the Republicans continue to assume that cutting government spending during an economic slow down will some how help the economy.  The last time the Republicans did that turned a recession in the Thirties into the Great Depression.

 

Every business man will tell you that cash flow is the most important thing to his business, cut cash flow, and profits will not happen.

If the government cuts cash flow to the economy by not spending on goods and services, the economy will contract.

Feb 26, 2013 6:03PM
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"Wow, if it's such a bad idea, why did Obama come up with it?"

 

Wow... anytime greed is inconvenienced, it's a bad idea. Did you note the Dow loss from yesterday was miraculously recovered today but the economy has been in the crapper since Dubya didn't pay his debt off? Did it occur to you that the sequester IS a cut in spending? Did you notice how many GOP puppets cried out for Obama to cut spending today? Who has the money? Why do they STILL have the money? If the sequester cuts spending and Republicans are still whining about cutting spending, who does the sequester ACTUALLY hurt? It will cripple Bernanke's scam, and screw up wealth's march to drain us all of money. THANK YOU, PRESIDENT OBAMA and SHAME ON YOU MITCH MCCONNELL FOR LYING TODAY AND SAYING... I was in the room when we agreed to the sequester but I had my fingers crossed behind my back. GET OUT, MITCH.  

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