Why Bernanke isn't advocating fiscal stimulus
By Neil Irwin
Ezra Klein challenges me to explain why Federal Reserve Chairman Ben Bernanke isn't beating the drum for more fiscal stimulus. It could, Ezra notes, reduce some of the pressure on the Fed to undertake unconventional monetary policy maneuvers of dubious effectiveness to boost the economy. I touched on this a couple of weeks back, but let me elaborate on what I take to be Bernanke's reasoning.
It just isn't his place. Bernanke and many in the Fed view then-chairman Alan Greenspan's endorsement of the 2001 Bush tax cuts as a mistake that cost the Fed some of its credibility by entering a highly politicized debate. Similarly, Bernanke feels that if he goes before Congress and rattles off his preferred taxing and spending policies (as opposed to giving more dispassionate comments about long-term fiscal policy), it would be usurping his role as an unelected official charged with making monetary policy. It could politicize the Fed further and leave him more open to second-guessing by Congress about the finer points of monetary policy. ("I don't think it's really my place to tell Congress which specific tax and spending policies to choose," Bernanke told the Senate Banking Committee last week. "I prefer to address the broader trajectory of fiscal stimulus.")
He kinda, sorta is already. In his testimony last week, Bernanke certainly didn't come out in favor of any specific spending programs, nor of boosting fiscal stimulus in the near-term. But if you adjust for the understated and opaque way in which Fed chairmen communicate, he was giving a mild thumbs up to continuing to run large budget deficits for a bit longer to support the economy. "At the current moment . . . the large deficits, as unattractive as they are, are important for supporting economic activity, and they were important also in restoring financial stability," he said. "And so I think they were justified in that respect, and I would be reluctant to withdraw that support too precipitously in the near term."
A stronger endorsement could be misinterpreted. Bernanke has consistently articulated the line that deficit spending makes sense in the short run, but that Congress needs to move aggressively to reduce the longer-run budget deficit. But if he came out endorsing short-run stimulative moves too explicitly, the risk is that Congress would ignore the second part of that prescription, preferring to hear only "Bernanke endorses stimulus," and increase the budget deficit now without any commensurate effort to reduce it over the next few years. And if the government were to spend a big chunk of money now but without showing any capacity to rein in deficits a couple of years down the road, there is a chance that bond investors would lose confidence in the U.S. fiscal situation, which would leave economic policy in a very difficult spot down the road.
My best guess is that Bernanke's preferred fiscal policy would be something like this: Spend more on unemployment insurance benefits, aid to states, and other social safety net spending now, maybe throw in a payroll tax holiday and some infrastructure spending over the next year or two, but combine those actions with firm, credible steps to reduce spending and raise taxes in 2013 or so, and strong mechanisms to stabilize the finances of Medicare and Social Security kicking in around 2015. But if he laid out a plan like that explicitly, there's a chance that members of Congress would hear only the first part.
July 26, 2010; 5:40 PM ET
Categories: Budget and fiscal policy , Federal Reserve
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