Bernanke's Fed Had to Compensate for Congress' 'Fiscal Drag'
Ben Bernanke said as much in his final press conference as chairman of the Federal Reserve, repeating the mantra that "monetary policy was not a panacea, it couldn't solve all of our problems."
But the unprecedented Bernanke-led stimulus program had to happen to compensate for Congress' inaction. Unemployment that reached 10% in October 2009 demanded radical action. Monetary policy, the Fed chairman said Wednesday, "can't do much or anything about about fiscal policy, which is working in quite the opposite direction."
By opposite direction, Bernanke was talking about the "fiscal drag," the degree to which government budget cuts reduce growth. To take but one example, the infamous sequestration, a product of Republican House Speaker John Boehner's leadership, prompted across-the-board cuts that the private economic forecasting firm Macroeconomic Advisers estimates cost the U.S. economy a total of 1.2 million jobs this year.
More recently, Democrats joined Republicans to reject calls to extend unemployment benefits, throwing salt on the wounds of some 1.3 million jobless workers who will see their benefits end. That's fiscal drag.
Yes, deficit reduction is important, and longer-term measures are necessary to bring down the country's debt. But short-term budget cutting has only forced children away from preschool classes, patients away from hospitals -- even the National Institutes of Health -- while furloughing government workers and services that are far from "nonessential."
At Tuesday's press conference, Bernanke cited a report by the Congressional Budget Office that estimated budget cuts generated about 1.5% in lost growth. That's a huge number considering that GDP for 2013 is likely to be around a relatively paltry 2%.
"It's not that Congress wasn't stimulating the economy, it was actively contracting it," Dean Baker, an economist at the Center for Economic Policy and Research in Washington, said in an interview on Wednesday. "They're patting themselves on the back in Congress because they cut the deficit, but the result has been pushing people out of work and causing lost output for nothing."
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