It was the largest exclusive event I have ever attended. Over 800 people crowded into the Minneapolis Hilton ballroom to hear Ben Bernanke’s speech to the Economic Club of Minnesota — and there was demand for three to four times as many seats as available.
Everybody wanted to attend Bernanke’s speech — and with good reason. As chairman of the Federal Reserve Bank, Bernanke is arguably the most powerful person in the world, after the heads of state of only a few countries. Bernanke, as chairman of the Federal Open Market Committee, holds enormous power over the current and future availability of U.S. dollars, the rate of inflation, and at least to some extent the rate of growth in the U.S. and world economies.
When Ben Bernanke talks, people listen.
And listen hard they must, because few men are more cautious about what they say, lest they inadvertently send the economy into a tailspin. Markets occasionally pay attention to what Presidents say, but they always listen carefully when Bernanke speaks.
Cautious on the surface
Bernanke’s speech in Minneapolis was cautious on the surface — in fact, many people I spoke to dismissed the attempt to find much substance because Bernanke “couldn’t say anything new” in case he spooked the markets.
But that isn’t exactly how I read the speech. There were no surprises, of course, but there was a lot to note if you listened carefully.
Bernanke didn’t sound optimistic about the prospects for much growth in the economy in the near to medium term. Business spending has been picking up a bit, and with the stabilization of commodity prices some headwinds slowing growth have died down. Yet the disastrous decline in the housing market continues to weigh heavily on the economy, and will for the foreseeable future.
Households just don’t have the purchasing power necessary to gin up economic growth, and despite widespread deleveraging too many Americans are under water on their mortgages and too many people are unemployed — essentially precluding any prospect of a consumption boom.
Housing has led the economy out of recessions since World War II. It won’t this time.
And while Bernanke insists that the financial sector is in much better shape than 2008, that isn’t saying much. The crisis has receded, but has health been restored? Certainly not for small businesses, which are still constrained by limited access to credit.
Unusually candid on fiscal policy
The most interesting part of Bernanke’s speech had almost nothing to do with monetary policy. He was unusually candid regarding, of all things, fiscal policy and the dangers of political paralysis. He acknowledged — even stressed — the unsustainability of current fiscal policies. Deficits, unfunded liabilities, and the lack of a credible plan to get our fiscal house in order are all dangers to the U.S. economy. But, Bernanke insisted more than once, those dangers are long-term. They require a “credible plan” to address them, but not immediate attention. In fact, Bernanke not-so-subtly implied, fiscal restraint today could harm prospects for economic growth. The private sector economy cannot generate enough economic demand, so government should avoid suppressing demand in its own sector.
He didn’t say it, but I read his comments to implicitly endorse more fiscal stimulus in the near term — provided, of course, that it is coupled with a “credible” long-term plan to address our fiscal problems.
Unfortunately, despite Bernanke’s hopes, such a path is just not in the cards. Without fiscal restraint today, it is impossible to believe that there is any hope for fiscal restraint tomorrow. Federal budgets are political documents, not technocratic ones. Given the history of the federal budget over the past few decades, it is impossible to believe that future Congresses will have any more will to cut spending than the last dozen have.
Spending, deficits, and debt have skyrocketed over the past three decades. The federal deficit today is more than twice the size of the entire federal budget when Reagan was elected. Not only has the size of government grown dramatically in recent years, but the size of unfunded future liabilities has skyrocketed as well. Less than two years ago the federal government decided to take responsibility for another 1/6th of the U.S. economy with Obamacare.
Bernanke’s message is predicated on the almost impossible: replacing a messy political process with a technocratic approach to fiscal policy. There aren’t many examples of this in the past, and few believe it is in the cards for the future.
“…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 federal 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.”
Plum out of credibility
Wouldn’t that be nice? But in what world would anybody give credibility to a plan which essentially promises to pay on Thursday for a hamburger today? The U.S. Congress is plum out of credibility, and has been for a while.
The only credible plan for deficit reduction in the future is deficit reduction now. Unless politicians are willing to pay a political price now, why should anybody be willing to believe that they or their successors will in the future? Bernanke’s call for fiscal stimulus now with deficit reduction in the future is simply a call for fiscal stimulus now.
Bernanke concluded his speech with an encomium to the enduring strength of the American economy. We remain the biggest and strongest economy in the world, with the resources available to meet and overcome the current crisis. “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 recess if — and I stress if — our country takes the necessary steps to secure that outcome.”
Of course those steps seem to depend upon a radical revision of the rules of politics — the prospects for which certainly I, and probably Bernanke himself, hold out slim hope. Until at least the next election, and perhaps not even then, our political system will remain in essential gridlock and the chances of a robust economic recovery seem dim.
David Strom is a Policy Fellow with the Minnesota Free Market Institute.