It would be nice if he just came out and said what was on his mind. But that's not the way the chairman of the Federal Reserve usually speaks. Still, Ben Bernanke is getting a lot more talkative when it comes to the nation's economic problems.
Part of the Fed's job is to keep inflation in check, which it has done, for the most part. But the Fed is also charged with keeping unemployment low, which may be far beyond its power. Since the politicians in Congress and the White House can't get anything done without brawling, the Fed now seems like the last hope for any new policies to jump-start the flagging recovery. The Fed is running out of options however, as Bernanke himself implicitly acknowledged in his recent Jackson Hole speech. "Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank," he reminded a worldwide audience.
The Fed has already done more than any other branch of government to forestall a depression, end a financial panic, and sow the seeds of economic recovery. While not always popular, the Fed's moves have certainly been aggressive. Under Bernanke, the Fed has rescued insurance giant AIG, granted more than $1 trillion in emergency loans to U.S. and European banks, slashed interest rates, and undertaken risky "quantitative easing" programs to help boost stock prices. As the Fed exhausts its arsenal, however, Bernanke has been dropping louder and louder hints about what Congress ought to do to pick up the slack. Here are some of the main suggestions embedded in Bernanke's typically circumspect rhetoric:
Reduce the national debt. Like nearly all economists, Bernanke is unequivocal about this. "U.S. fiscal policy must be placed on a sustainable path that ensures that debt relative to national income is at least stable or, preferably, declining over time," he said in his Jackson Hole speech. Bernanke also seems disgusted by the destructive political brinksmanship during the recent battle over the debt ceiling, which damaged confidence, sent stock markets reeling and ultimately left all the biggest issues unresolved. "The country would be well served by a better process for making fiscal decisions," Bernanke noted drily.
Get entitlements under control. This too is a refrain often heard among economists, since the cost of Medicare and Medicaid in particular is rising at a pace that will bankrupt the U.S. government eventually. "The increasing fiscal burden that will be associated with the aging of the population and the ongoing rise in the costs of health care make prompt and decisive action in this area all the more critical," Bernanke said.
Formulate a plan now…. In a June speech, Bernanke said that "acting now to put in place a credible plan for reducing future deficits would not only enhance economic performance in the long run, but could also yield near-term benefits by leading to lower long-term interest rates and increased consumer and business confidence." Congress didn't listen. Instead, the outcome of the summer debt-ceiling battle was a plan to cut a bit of spending now, with more unspecified cuts to be determined later. And the debt deal wrecked consumer and business confidence instead of boosting it, since Republicans demonstrated economic recklessness and Democrats seemed managerially incompetent.
… But phase it in gradually. America's biggest economic problem at the moment isn't the national debt, it's chronic joblessness and a weak economy bordering on a double-dip recession. That's why it's important to enact a credible debt-reduction plan now, but wait a few years before spending cuts or other austerity measures go into effect. In Bernankespeak: "Policymakers could commit to enacting in the near term a clear and specific plan for stabilizing the ratio of debt to GDP within the next few years and then subsequently setting that ratio on a downward path."
Help fix the housing market. Stimulus plans have become unpopular, but since the economy isn't really recovering on its own, the case for renewed government action is growing stronger. One area the government could target is housing, which is a huge drag on the economy that hasn't benefitted as once hoped from bank bailouts and low interest rates. In Jackson Hole, Bernanke singled out housing as a key sector that usually helps drive the economy out of recession, but this time is holding back the recovery instead. And while he thinks housing will bounce back eventually, he argued that "good, proactive housing policies could help speed that process." The Obama administration is supposedly looking at new ways to help distressed homeowners, which could make a homeowner-bailout plan one of the big political battles between the White House and Congress this fall.
Consider a value-added tax. There's growing consensus that America needs tax reform in order to reduce loopholes for favored groups and special interests and revert to a simplified tax structure—perhaps with lower rates. "To the fullest extent possible," Bernanke said, "our nation's tax and spending policies should increase incentives to work and to save." That's economist code for a value-added tax or VAT, which would basically amount to a national sales tax on most things people buy. Many economists would like to see lower taxes on income—which would raise the return on labor and therefore increase the incentive to work—combined with higher taxes on goods and services, which would make buying stuff more expensive and therefore encourage people to spend less and save more. The simplest way to do that is with a VAT, which most developed nations have. Bernanke hasn't endorsed the idea outright, and many conservatives are deeply opposed because they feel it would simply generate a lot of new revenue for the government to spend. To have any chance, a VAT would probably have to be combined with deep cuts in income and corporate taxes.
Invest in R&D and infrastructure. Bernanke would also like to see tax and spending policies that "encourage investments in the skills of our workforce, stimulate private capital formation, promote research and development, and provide necessary public infrastructure." That might require new or enhanced tax breaks for things like hiring or retraining workers, bringing more multinational profits back to the United States and investing in R&D. The Obama administration may also try to develop an "infrastructure bank" that would use government guarantees to back private investment meant to improve the nation's roads, bridges and other byways.
Abolish the legislative branch. Okay, Bernanke didn't go quite that far, but he dished up some of the most pointed criticism of leading politicians to come out of a Fed chairman's mouth in recent memory. "The negotiations that took place over the summer," he said, "disrupted financial markets and probably the economy as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses." In other words, Bernanke, like many Americans, found that key policy-making negotiations between the legislative and executive branches failed the nation.
What the Fed chairman would like to see instead: Inviolable goals and targets for reducing the debt, with enforcement mechanisms that guarantee it'll happen. "Of course," he added, "formal budget goals and mechanisms do not replace the need for fiscal policymakers to make the difficult choices that are needed to put the country's fiscal house in order, which means that public understanding of and support for the goals of fiscal policy are crucial." That's a mouthful, so here's a translation: Congress, get a clue.