Fed Chairman Ben Bernanke testified before the Joint Economic Committee Tuesday, telling Congress the recovery isn’t what he hoped for, and is now in danger of faltering. He said the Fed's recent action is not a "panacea" for the economy and offered four objectives lawmakers should consider when formulating recovery plans.
“[I]t is clear that, overall, the recovery from the crisis has been much less robust than we had hoped,” Bernanke said. “Recent revisions of government economic data show the recession as having been even deeper, and the recovery weaker, than previously estimated.… Slow economic growth has in turn led to slow rates of increase in jobs and household incomes.”
Noting the unrest in the Middle East and North Africa, strong growth in emerging market economies and “other developments,” Bernanke said the resulting increases in the prices of oil and other commodities damped consumer purchasing power and spending; and the disaster in Japan disrupted global supply chains and production, particularly in the automobile industry.
“With commodity prices having come off their highs and manufacturers' problems with supply chains well along toward resolution, growth in the second half of the year seems likely to be more rapid than in the first half,” he said. "However, the incoming data suggest that other, more persistent factors also continue to restrain the pace of recovery.”
The most significant factor depressing consumer confidence, Bernanke testified, has been the poor performance of the job market. Over the summer, he said, private payrolls rose by only about 100,000 jobs per month on average—half the rate posted earlier in the year. He added recent indicators, including new claims for unemployment insurance and surveys of hiring plans, “point to the likelihood of more sluggish job growth in the period ahead.”
Bernanke then advised policymakers to consider four key objectives in setting tax and spending policies. The first is to achieve long-run fiscal sustainability.
“The federal budget is clearly not on a sustainable path at present,” he said. The Joint Select Committee on Deficit Reduction … is charged with achieving $1.5 trillion in additional deficit reduction over the next 10 years on top of the spending caps enacted this summer. Accomplishing that goal would be a substantial step; however, more will be needed to achieve fiscal sustainability.”
The second objective is to “avoid fiscal actions that could impede the ongoing economic recovery.”
“These first two objectives are certainly not incompatible, as putting in place a credible plan for reducing future deficits over the longer term does not preclude attending to the implications of fiscal choices for the recovery in the near term,” he said.
The third objective should aim to “promote long-term growth and economic opportunity. As a nation, we need to think carefully about how federal spending priorities and the design of the tax code affect the productivity and vitality of our economy in the longer term.”
The fourth objective is to “improve the process for making long-term budget decisions, to create greater predictability and clarity, while avoiding disruptions to the financial markets and the economy. In sum, the nation faces difficult and fundamental fiscal choices, which cannot be safely or responsibly postponed.”
He concluded by downplaying the potential impact of so-called “Operation Twist,” noting “monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the U.S. economy. Fostering healthy growth and job creation is a shared responsibility of all economic policymakers, in close cooperation with the private sector.”