November 24, 2020

Fed Chairman Defends Stimulus Efforts

Mr. Bernanke, in written testimony submitted to the Senate Banking Committee, also urged Congress and the Obama administration to replace the sequestration cuts scheduled to begin Friday with a plan to reduce federal deficits more gradually.

“Although monetary policy is working to promote a more robust recovery, it cannot carry the entire burden of ensuring a speedier return to economic health,” Mr. Bernanke said. He warned that the combination of previous spending cuts and sequestration “could create a significant headwind for the economic recovery.”

Still, Mr. Bernanke was relatively upbeat about the health of the broader economy, which he described as growing at a “moderate if somewhat uneven pace.”

He said disappointing growth in the fourth quarter “does not appear to reflect a stalling-out of the recovery.” Consumer demand kept rising and, he said, “Available information suggests that economic growth has picked up again this year.”

Mr. Bernanke, who reports to Congress on monetary policy twice each year, used his written testimony to strongly defend the Fed’s expansion of its economic stimulus campaign in September and December to reduce unemployment more quickly. He will answer questions from the Senate committee Tuesday morning, then testify before the House Financial Services Committee on Wednesday morning.

The Fed, which has amassed almost $3 trillion in Treasury and mortgage-backed securities, is expanding those holdings by $85 billion a month until it sees clear improvement in the labor market. It plans to hold short-term interest rates near zero even longer, at least until the unemployment rate falls below 6.5 percent.

“In the current economic environment, the benefits of asset purchases, and of policy accommodation more generally, are clear,” Mr. Bernanke said. “Monetary policy is providing important support to the recovery” while keeping inflation in check.

The asset purchases and the interest-rate policy are designed to reduce borrowing costs for businesses and consumers. Mr. Bernanke said the recovery of the housing market and higher sales of automobiles, among other durable goods, demonstrated the benefit of the Fed’s campaign.

Fed Governor Jeremy C. Stein and some other Fed officials have expressed concern in recent months that low interest rates are encouraging excessive risk-taking by investors pursuing higher returns. Mr. Stein in a recent speech highlighted rising demand for junk bonds and certain kinds of real estate investments, and shifts in bank balance sheets, as areas of potential concern.

Mr. Bernanke said Tuesday that the Fed takes these concerns “very seriously,” noting that the central bank has significantly expanded its efforts to monitor financial markets, and has given greater priority to financial regulation.

But he noted that low interest rates also were helping to strengthen the financial system, by encouraging companies to increase reliance on long-term funding, allowing debt levels to decline and strengthening growth.

He added that he saw no reason to consider a change in course.

“To this point we do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery and more rapid job creation,” Mr. Bernanke said.

He also downplayed the concern expressed by some Fed officials and analysts that the central bank’s plans to control inflation as the economy recovers could be complicated by a political backlash because it may lose money as it sheds some of its vast holdings of Treasuries and mortgage bonds.

Such losses could be large enough to prevent the Fed from transferring profits to the Treasury Department for the first time since 1934, according to a Fed analysis.

Mr. Bernanke, noting the Fed has transferred $290 billion to Treasury since 2009, said it was “highly likely” Treasury still would see a net benefit from the purchases because any losses would not exceed those profits.

“Moreover, to the extent that monetary policy promotes growth and job creation, the resulting reduction in the federal deficit would dwarf any variation in the Federal Reserve’s remittances to the Treasury,” he said.

When Mr. Bernanke last appeared before Congress in July, he identified three major obstacles to faster growth: the depressed housing market, the financial crisis in Europe, and American fiscal policy. In his prepared testimony Tuesday, he did not mention Europe and barely touched on housing. But he warned that government policy was continuing to slow the pace of economic growth.

The recent agreements to reduce deficits, Mr. Bernanke said, focused on short-term spending cuts while doing little to address longer-term imbalances.

“To address both the near- and longer-term issues,” he said, “the Congress and the administration should consider replacing the sharp, front-loaded spending cuts required by the sequestration with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run.”

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Economix Blog: The Golden Age of Republican Deficit Hawks

I’ve written a few pieces in the last several days about the history of deficit reduction packages, and how Republicans used to be on board for tax increases. I suggested that at the very least, Republicans were more willing to compromise on using tax increases to cut deficits, even if they preferred to balance the budget wholly through the spending side.

Several readers wrote in, asking whether Republicans were ever really pro-tax, or if they merely put up with higher taxes in the name of fiscal discipline.

The answer is that once upon a time, Republicans did indeed advocate leaving taxes alone, opposing tax cuts.

In the 1950s and 1960s, federal deficits were relatively small compared to the size of the economy, but even during those flush years, Republican leadership was reluctant to advocate tax cuts. In 1953, for example, Dwight Eisenhower said the country “cannot afford to reduce taxes, reduce income, until we have in sight a program of expenditures that shows that the factors of income and of outgo will be balanced.”

And when his successor, John F. Kennedy, proposed sharp tax cuts in 1963, the more conservative Republicans in Congress initially opposed them because the cuts would expand the deficit.

The legislation eventually passed (after Kennedy’s assassination), but over the objections of about a third of the Republicans voting. Here’s the House vote, and here’s the Senate vote.

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Economy Hampers Deficit Panel, Budget Office Says

At the same time, the director, Douglas W. Elmendorf, told a powerful new Congressional committee on deficit reduction that the government’s growing debt would “lead to lower output and incomes” and could “increase the probability of a sudden fiscal crisis.”

As the 12-member panel began its race against a November deadline to recommend substantial federal savings, Mr. Elmendorf said its task had become more difficult because the outlook for the economy had worsened in the last month.

“We expect employment to expand very slowly during the rest of this year and next year, leaving the unemployment rate close to 9 percent through the end of 2012,” Mr. Elmendorf said.

The panel is supposed to recommend ways to reduce federal deficits by at least $1.2 trillion over 10 years, or else the government will make across-the-board cuts in many federal programs to achieve those savings.

Under the law, the committee must take a final vote by Nov. 23, but Mr. Elmendorf said his office would need a legislative proposal by early November to assess its impact on the deficit.

Republican members of the panel said growth in federal spending — for Medicare, Medicaid and Social Security, in particular — was the main factor in the nation’s fiscal problems. Mr. Elmendorf said spending for the big three benefit programs would account for 12.2 percent of the gross domestic product in 2021, compared with an average of 7.2 percent in the last 40 years.

The difference, 5 percent of the economy, “is a very big number,” Mr. Elmendorf said.

Democrats said higher revenues were essential. Federal revenues are equivalent to 15.3 percent of the G.D.P. this year, compared with an average of 18 percent over the last 40 years, the budget office said. Under current law, which provides for the expiration of Bush-era tax cuts in 2013, revenues will grow to nearly 21 percent of the economy by 2021, it said.

Representative Chris Van Hollen, Democrat of Maryland and a member of the committee, said that without higher revenues, “you are talking about dramatic cuts in health and retirement security for America’s seniors.”

But Representative Dave Camp, Republican of Michigan and chairman of the House Ways and Means Committee, said, “Federal revenues have equaled or exceeded 20 percent of G.D.P. only three times: in 1944 and 1945, during World War II, and in 2000,” when the government ran a surplus.

Two Republicans on the deficit reduction committee, Senator Jon Kyl of Arizona and Representative Fred Upton of Michigan, said they believed that the government could save large amounts of money by rooting out fraud and waste in benefit programs.

Mr. Elmendorf told lawmakers that “there is no evidence” to suggest that such antifraud efforts could produce a large share of the $1.2 trillion in deficit reduction the panel is supposed to recommend.

The budget office director put a price tag on the cuts that would occur automatically if legislation originating in the committee did not become law by Jan. 15.

Military spending would be cut by $454 billion over 10 years, Medicare by $123 billion and other domestic programs by more than $300 billion, he said. With these cuts, the government would have less need to borrow, so debt-service costs would be reduced by nearly $170 billion over 10 years, he added.

Senator Rob Portman, Republican of Ohio and a member of the panel, said the goal of saving $1.2 trillion to $1.5 trillion was formidable but realistic in the larger context of federal spending. The budget office estimates that the federal government will spend $44 trillion in the coming decade.

One of the most difficult questions for the panel is how to reduce the budget deficit without threatening the fragile economic recovery.

Mr. Elmendorf said, “There is no inherent contradiction between using fiscal policy to support the economy today,” with tax cuts or additional spending, and “imposing fiscal restraint several years from now.”

However, Republicans were skeptical of that approach. Too often, they said, the additional spending, though labeled temporary, has become permanent, as with some provisions of the economic stimulus law adopted in 2009.

On one point lawmakers agreed on Tuesday.

“All problems are easier to solve with a strong, growing economy,” said Senator Patrick J. Toomey, Republican of Pennsylvania.

Senator John Kerry, Democrat of Massachusetts, said, “We need growth, not just revenue and not just cuts.”

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