The Federal Reserve chairman says that the central bank will do its part to ensure the economy keeps growing but worries that government could get in the way of the recovery
In a speech on Thursday, Federal Reserve Chairman Ben Bernanke provided some reassurance on the stalling recovery, along with a warning. He attributed the weak first half of 2011 mostly to temporary shocks to the economy. While the damage those events caused could affect the second half of the year, he stressed that the U.S. economy should continue to grow -- unless policymakers screw things up. He also asserted that the central bank will do its part to continue to stimulate growth.
The Danger of Austerity
Perhaps the most striking part of Bernanke's speech was his clear explanation of how Congress should view budget cutting:
The prospect of an increasing fiscal drag on the economy in the face of an already sluggish recovery highlights one of the many difficult tradeoffs currently faced by fiscal policymakers. As I have emphasized on previous occasions, without significant policy changes to address the increasing fiscal burdens that will be associated with the aging of the population and the ongoing rise in health-care costs, the finances of the federal government will spiral out of control in coming decades, risking severe economic and financial damage. But, while prompt and decisive action to put the federal government's finances on a sustainable trajectory is urgently needed, fiscal policymakers should not, as a consequence, disregard the fragility of the economic recovery. Fortunately, the two goals--achieving fiscal sustainability, which is the result of responsible policies set in place for the longer term, and avoiding creation of fiscal headwinds for the recovery--are not incompatible. Acting now to put in place a credible plan for reducing future deficits over the long term, while being attentive to the implications of fiscal choices for the recovery in the near term, can help serve both objectives. (my emphasis)
In short, Congress should continue to spend now and plan to pay later. Many in Washington don't share Bernanke's philosophy here, however. Some Republicans are calling for immediate budget cuts, and few would support additional stimulus spending. This political reality must worry Bernanke. Towards the end of his speech, he warns: "Thus I do not expect the long-run growth potential of the U.S. economy to be materially affected by the financial crisis and the recession if--and I stress if--our country takes the necessary steps to secure that outcome." (his emphasis)