NEW YORK (TheStreet) -- If the federal government had been more active over the past five years in helping to spur growth, the Federal Reserve wouldn't have had to take drastic measures to jump-start an economy still suffering from the aftershocks of the financial crisis.
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."
Back in 2009, Congress did provide a jolt to the U.S. economy through the Obama stimulus known as the Recovery Act. But two years later, the Tea Party upwelling within the Republican Party put a quick stop to fiscal stimulus, inexcusably slowing a nascent recovery. The purpose of the stimulus was to create the necessary conditions to spur the private sector to spend its billions in cash-on-hand to create jobs.
Remember, U.S. companies are holding a lot of cash. Moody's estimates that at the end of June, nonfinancial U.S. companies held $1.48 trillion in cash, according to a review of the more than 1,000 companies it rates. That pile has ballooned 81% from $820 billion at the end of 2006.
With a push from government, the private sector might be spending some of that money on their businesses, employing people and by extension, generating growth.
Bernanke's focus on unemployment led many of his critics to argue that he wasn't sufficiently concerned about inflation. But he was, and the fact that inflation remains well below the Fed's 2% target demonstrates for the present anyway, that the doomsday forecasts of out-of-control prices fueled by easy money were at best premature, or simply wrong.
U.S. growth might have slipped into deflation had the Fed not taken pursued the "quantitative easing" measures that translated into buying $85 billion in asset-back securities each month for the past nearly two years.
"On the whole, except for in 2009, we've had very tight fiscal policy," Bernanke said on Tuesday. "People don't appreciate how tight fiscal policy has been."
The Fed chief pointed out that government employment has cut 600,000 jobs from the trough of the recession. By comparison, he said, following the last recession, government at all levels had added 400,000 jobs by this point in its recovery. Unemployment still remains at an unacceptable 7%, and according to the latest numbers from the Labor Department, jobless claims rose in the week ended Dec. 14, surprising economists who had forecast a lower number.
The economy still needs both activist monetary and fiscal policies. That means a continuation of the Fed's stimulus program, now at $75 billion a month in asset purchases and government programs to put people and contractors back to work. Job growth remains wanting even as the Standard & Poor's 500 Index
Curiously, China could provide something of a panacea, says Baker. The decision by policymakers in the world's second-largest economy to focus on domestic consumption rather than exports might provide the U.S. economy with a decisive push to lift growth to more respectable levels.
"Maybe China reordering its economy provides the catalyst that we need," Baker said. "The irony is that we're looking to China to provide a boost to the U.S. economy -- but we'll take what we can get."
-- Written by Leon Lazaroff in New York.
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