In his congressional testimony yesterday, Fed Chair Ben Bernanke called out the Congress. He warned them to stop the reckless and mindless spending cuts that are killing jobs and growth. Their stupidity, he suggested, poses the biggest threat to Americans going back to work.
Of course, he didn't phrase it quite like that. His testimony was purposefully vanilla, designed not to cause indigestion on Wall Street. But that didn't stop him from indicting the Congress. In his first sentence he stated:
"The economic recovery has continued at a moderate pace in recent quarters despite the strong headwinds created by federal fiscal policy."
Translated: If you idiots abandon your destructive austerity fetish, we might be able to put people back to work.
The Congressional Budget Office reports that the deficit has come down, as percentage of the economy, by about 60 percent since 2009. It's dropping at a faster rate than any time since the demobilization after World War II, far exceeding prudent speed limits.
The administration wants to celebrate economic growth, with job production averaging about 200,000 a month this year. But the Fed Chair is more sober.
"[T] he jobs situation is far from satisfactory, as the unemployment rate remains well above its longer-run normal level, and rates of underemployment and long-term unemployment are still much too high."
In fact, the economy is barely moving. The Fed "Beige book" projects second quarter growth from April to June at 1 percent or less, the third straight quarter under 2 percent. We are closer to a return to recession than a return to health.
And, inflation is at the lowest pace on record --- about 1 percent over the last year. Bernanke felt it necessary to warn explicitly about the risk of deflation -- of prices falling, which devastates debtors and homeowners and would torpedo any recovery:
"[V]ery low inflation poses risks to economic performance -- for example, by raising the real cost of capital investment -- and increases the risk of outright deflation."
So Bernanke reassured markets that despite the pressure from conservatives in the Congress and ideologues in economic departments, the Fed would continue its extraordinary measures -- short-term interest rates near zero, and (the printing of) purchase of $85 billion a month in mortgage backed securities and treasuries till things got better.
The Fed does anticipate that things will get better. The biggest risk: that the Congress will screw things up. Or in Bernanke language:
"The risks remain that tight federal fiscal policy will restrain economic growth over the next few quarters by more than we currently expect, or that the debate concerning other fiscal policy issues, such as the status of the debt ceiling, will evolve in a way that could hamper the recovery."
Bernanke's testimony received little coverage since it did not shake the markets. And his warnings fell on deaf ears in the Congress.
Republicans in the Congress are gearing up for another fight this fall on the budget, the sequester cuts and the debt ceiling. They are insisting on more spending cuts from domestic programs -- education, child nutrition, research and development, clean water etc. They want the next sequester cuts to be carved out only from domestic services, not the Pentagon. And they are planning a faceoff over the debt ceiling to exact cuts in basic security guarantees -- Medicare, Medicaid and Social Security.
The debate will be about how much and what to cut -- not about how to stop killing jobs and start creating the foundation for good jobs.
If nothing changes, Congress will continue to cost jobs and put the weak recovery at risk. Warnings by the conservative head of the IMF and the conservative Republican head of the Federal Reserve will be ignored. Republicans are intent on laying waste to government. The White House seems unable or unwilling to make the case clearly for jobs. Change will come only if citizens demand it from outside the beltway.
The Federal Reserve, as Bernanke noted, will continue to do what it can to keep the economy from sinking. But that would be a lot easier if Congress would stop punching holes in the bottom of the boat.