Chad Stone is chief economist at the Center on Budget and Policy Priorities.
In recent congressional testimony, Federal Reserve Chairman Ben Bernanke clearly explained what's still wrong with the economy, outlined the Fed's thinking on monetary policy and strongly implied that fiscal policy is still off base. His account and policy recommendations reflect mainstream economic thinking – and, thus, run counter to much of the economic doctrine that's driving Republican budget policies.
Here's how Bernanke sees the economy: though payroll employment has expanded by about 6 million jobs since its low point and unemployment has dropped by about 2.5 percentage points from its peak, the job market remains weak overall. I couldn't agree more.
Bernanke points to the same indicators I would. The unemployment rate is still too high, too many of the unemployed have been looking for work for more than six months, too many people have stopped looking at all while job prospects remain dim, and nearly 8 million people are working part time even though they'd prefer full-time work. I'm glad to see him emphasize how "extraordinarily costly" this situation is:
Not only do [high levels of unemployment and underemployment] impose hardships on the affected individuals and their families, they also damage the productive potential of the economy as a whole by eroding workers' skills and – particularly relevant during this commencement season – by preventing many young people from gaining workplace skills and experience in the first place. The loss of output and earnings associated with high unemployment also reduces government revenues and increases spending on income-support programs, thereby leading to larger budget deficits and higher levels of public debt than would otherwise occur.
While unemployment is still a major concern, inflation isn't. Therefore, the Fed is appropriately interpreting its "dual mandate" to foster both "maximum employment" and "price stability" as requiring "a highly accommodative monetary policy." That means keeping its short-term interest rate target as low as possible until unemployment falls closer to normal long-term levels and monitoring its program of purchasing longer-term assets – as long as inflationary expectations remain low. As the Fed notes, this policy carries some risks, but the risks and costs of continuing high unemployment are far greater.
Republicans, in contrast, want to remove "maximum employment" from the Fed's policy concerns. They seem to see our most pressing problem as the possibility of future inflation, not the reality of current high unemployment. The Republican chairman of the Joint Economic Committee, where Bernanke testified, wants to replace the dual mandate with a single mandate for long-term price stability. Even some conservatives recognize that, during major recessions, that's a recipe for disaster. An even more extreme policy – a return to a gold standard – made it into the 2012 Republican platform.
On fiscal policy, Bernanke recognizes that recent policy decisions have tilted too far toward short-term budget austerity, while largely ignoring longer-term budget challenges. He neither shared Republicans' disdain for stimulus policies nor endorsed their flirtation with "expansionary austerity" arguments.
Federal fiscal policy, taking into account both discretionary actions and so-called automatic stabilizers, was, on net, quite expansionary [emphasis added] during the recession and early in the recovery. However, a substantial part of this impetus was offset by spending cuts and tax increases by state and local governments, most of which are subject to balanced-budget requirements, and by subsequent fiscal tightening at the federal level.
While too much fiscal restraint has hampered the economic recovery, policymakers have done little to address longer run fiscal challenges that will begin to reappear later in the decade. Bernanke's counsel:
Importantly, the objectives of effectively addressing longer-term fiscal imbalances and of minimizing the near-term fiscal headwinds facing the economic recovery are not incompatible. To achieve both goals simultaneously, the Congress and the Administration could consider replacing some of the near-term fiscal restraint now in law with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run.
By contrast, the House Republican budget goes full bore on deficit reduction, starting immediately – jobs be damned.
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