Members of Congress had plenty of things to ask Ben Bernanke on Thursday, but he also had a plea to them: H-E-L-P!
But Chairman Bernanke told Congress the Fed alone can’t put Americans back to work. The economy needs help from fiscal policy, too.
“I’d be much more comfortable if Congress would take some of this burden,” he said. As face-to-face comments from the Federal Reserve chief to powerful members of Congress go, that’s pretty blunt.
Bernanke said economic growth and job creation would be aided if Congress could take decisive steps to mend US policies on taxes and government spending. The ideal path forward is a tricky one, he added: to avoid a tax-hike shock in the near term while also setting the nation on track to control public debt levels in the medium term.
The nation faces a so-called fiscal cliff of tax hikes that are scheduled to go into effect Jan. 1, which Bernanke said could push America into recession if unaddressed by Congress.
At the same time, he called the pace of buildup in national debt – caused by federal spending that isn’t matched by tax revenues – unsustainable.
As if to underscore that point, the ratings firm Fitch said Thursday that the US could see its AAA credit rating downgraded in 2013 if the US doesn’t put in place a serious deficit-reduction plan.
Given that it’s an election year, with little sign of agreement between the parties, it appears unlikely that a fiscal accord will be reached before the November election. By early in the new year, the Treasury is set to run up against its borrowing limit, which is set by Congress. That means the wider debate over taxes and spending could be linked to brinkmanship over a deadline for raising the debt ceiling.
Bernanke’s comments came as he testified before a joint House-Senate committee on the economy.
Lawmakers asked him about what the Fed can do to spur growth, guard against inflation (or deflation), and fend off a potential credit squeeze if Europe‘s crisis of debt and politics deepens. He said the Fed stands ready to support the US banking system.
But even as he responded to individual questions, Bernanke also pushed his fiscal message. At one point he referred to it as what “I’ve been trying to sell here for the last couple of hours.”
Fed chiefs don’t make public recommendations on policy matters that are outside their purview. So Bernanke didn’t say whether Congress should or shouldn’t extend Bush-era tax cuts that are poised to expire. Rather, he said it’s up to Congress to decide whether to renew certain tax cuts or to make other moves to address the fiscal cliff.
But he said that if Congress does nothing, the economy would take a short-term hit equal to about 3 to 5 percent of gross domestic product. With the economy growing at a pace of about 2 percent currently, such a blow could tip the nation officially back into recession.
The downdraft in GDP would come as households see taxes rise on ordinary income and capital gains. Federal spending cuts are also scheduled under current law, which many economists say would reduce economic activity as well.
So the message Bernanke was “trying to sell” is to avoid that fiscal cliff while also laying out a longer-term plan to reduce federal deficits during the next few years.
This week, the Congressional Budget Office sent the same signal in a new report. The CBO said the budget problems can be addressed through federal spending cuts, tax hikes, or some combination of those two. But failing to address the problem would mean slower economic growth in the future, CBO director Douglas Elmendorf said.
Politically, it’s a tough challenge. Some lawmakers have developed proposals and tried to cultivate bipartisan support.
Bernanke voiced gratitude: “I congratulate you on these efforts,” he said.