Ben Bernanke's testimony before Congress Tuesday emphasized several things. First, he noted that the economy is recovering slower than the Fed expected. In fact, "the recovery is close to faltering." Second, he emphasized that the Fed has acted aggressively to support growth, and while there is still more the Fed can do. Third, and importantly, he emphasized that although the Fed can do more to help the economy, the Fed cannot do this alone -- its powers are limited at this point -- and it needs help from fiscal policy authorities. He has made this point before, but in today's testimony it is more forceful and urgent than in the past:
Another factor likely to weigh on the U.S. recovery is the increasing drag being exerted by the government sector. Notably, state and local governments continue to tighten their belts by cutting spending and employment in the face of ongoing budgetary pressures, while the future course of federal fiscal policies remains quite uncertain. ...
I would submit that, in setting tax and spending policies for now and the future, policymakers should consider ... key objectives. One crucial objective is to ... avoid fiscal actions that could impede the ongoing economic recovery. ...To drive the point home, the end of the speech emphasizes that monetary authorities need help from fiscal policymakers:
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... Fiscal policy is of critical importance, as I have noted today, but a wide range of other policies--pertaining to labor markets, housing, trade, taxation, and regulation, for example--also have important roles to play.I have been skeptical that the Fed will do any more to try to help the economy. Recent speeches from Federal Reserve policymakers have emphasized how much the Fed is already doing, and they have conveyed resistance to doing more. I still think further action will be a tough sell on the committee, but this speech makes me think further action is more likely than I thought. I think the Fed should have done more already, it has not been aggressive enough given the severity of the unemployment crisis, but at least the door is still open.
But the most significant part of these remarks is the call for fiscal policymakers to do more to help the economy, or at the very least to not make things worse through deficit reduction while the economy is trying to recover. As Greg Ip points out, "the biggest policy-related threat is the fiscal tightening that will happen automatically in the next four months as prior stimulus expires and legislated cuts to discretionary spending bite." President Obama's proposed $447 billion dollar job creation program could help to offset this automatic fiscal tightening, but the future of this legislation does not look promising.
We need more action from the Fed, but I agree with Bernanke that monetary policy alone is not powerful enough to make large inroads into the unemployment problem. So fiscal policy -- which can make a big difference if it's targeted correctly -- is very much needed. Unfortunately, Congress is unlikely to do anything more to help. In fact, we'll be lucky if Congress doesn't cut the deficit further and make things worse.
If Congress would put people ahead of politics, the outlook for the unemployed might be better. But it doesn't look like that's going to happen.