Federal Reserve Chairman Ben Bernanke spoke to the Joint Economic Committee this morning, and as expected, much of the attention was on his expectations with regard to monetary policy. The Fed will, Bernanke explained, pull back from its quantitative easing, but not before the economy shows it can handle the departure.
But as it often the case, what interested me were Bernanke's not-so-subtle hints to lawmakers about their role in making the economy worse.
Bernanke touted the Fed's efforts to lift the economy but warned Congress that the central bank's actions will be insufficient to stave off a drag on the economy caused by rising taxes and spending cuts.
A bevy of fiscal policy issues -- including the expiration of the payroll tax cut, tax increases, budget caps on discretionary spending and the cuts to government spending from sequestration -- are creating headwinds that will "exert a substantial drag on the economy this year," he said.
"Taking them all together, they have the effect of being a drag on economic growth, perhaps more than necessary."
With interest rates near zero, the Fed "does not have the capacity to fully offset an economic headwind of this magnitude." ... "Monetary policy is not omnipotent," Bernanke said.
To be sure, this is all very polite and professional in tone, and I suspect some of the members of Congress on the Joint Economic Committee didn't fully appreciate what Bernanke was saying.
So let's translate a bit: the Fed chairman was telling Congress that taking money out of the economy, as Republicans insist we keep doing, is the one thing holding an American economic recovery. While Bernanke is trying to make it easier for the economy to grow, his efforts are being negated by Congress, which is making it harder for the economy to grow by embracing austerity measures and focusing on deficit reduction. The unsatisfactory status quo is, quite literally, largely lawmakers' fault.
He'd never say this out loud, of course, but Bernanke was effectively trying to argue, "While I'm trying to keep the water out of the boat to keep it from sinking, you guys are inexplicably trying to pour more water back into the boat. Please stop."
This isn't the first time the Fed chairman has pleaded with Congress to get smarter about economic policy, and I'll confess, it amazes me every time.
To reiterate a point we last discussed in December, Bernanke has, over the last few years, occasionally abandoned subtlety and explicitly pleaded with Congress to consider fiscal stimulus, but Republicans have always refused. (Indeed, GOP lawmakers haven't just been content to ignore the need for fiscal remedies, they've also demanded that Bernanke stop trying to improve the economy through monetary measures.)
Bernanke wants Congress to act as a partner, working alongside the Fed to strengthen the economy. Instead, Congress has acted as an opponent, pushing in the opposite direction.
In fact, congressional Republicans see Bernanke's explanation that unnecessary government spending cuts are undermining the recovery, and they respond with two arguments: (1) we need more unnecessary government spending cuts; and (2) the Republican Fed chairman must be some kind of liberal.
And what of the tax increases? Republicans demanded an end to the payroll tax break, too. As for the income tax hikes on the wealthy, they're largely responsible for sharp reduction in the deficit, which is what Republicans have claimed is their top priority.