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Fed Chair Bernanke Boosts House GOP On Spending Cuts

Federal Reserve Chairman Ben Bernanke speaks during a hearing of the Senate Banking, Housing and Urban Affairs Committee on Tuesday. i i

Federal Reserve Chairman Ben Bernanke speaks during a hearing of the Senate Banking, Housing and Urban Affairs Committee on Tuesday. Brendan Smialowski/Getty Images hide caption

itoggle caption Brendan Smialowski/Getty Images
Federal Reserve Chairman Ben Bernanke speaks during a hearing of the Senate Banking, Housing and Urban Affairs Committee on Tuesday.

Federal Reserve Chairman Ben Bernanke speaks during a hearing of the Senate Banking, Housing and Urban Affairs Committee on Tuesday.

Brendan Smialowski/Getty Images

House Republicans received substantial political cover Tuesday for their goal of reducing federal spending during the current fiscal year by $61 billion when Federal Reserve Chairman Ben Bernanke disputed dire warnings by private economists that those cuts could severely damage the economic recovery.

Responding to a question from a Democratic senator in testimony before the Senate Banking Committee, Bernanke said the central bank's economists predict a much smaller negative impact on the economy from the cuts than what was forecast by experts at both Goldman Sachs and Moody Analytics.

In contrast to Goldman Sachs' prediction that the cuts could reduce the gross domestic product by as much as two percentage points, Bernanke said his economists foresee a reduction of less than half that.

And Bernanke said the estimate of some of those private economists of as many as 700,000 in job losses from the cuts was significantly higher than the numbers Fed economists arrived at.

House Republicans quickly seized on Bernanke's statement as support during Tuesday's House debate on a new stopgap spending bill to keep the federal government from partly shutting down Friday.

Republicans had earlier rejected the private economists' warnings, citing one who agreed with them, John Taylor of Stanford University's Hoover Institution.

But Bernanke provided a far bigger cudgel for Republicans to use against Democrats.

Here's Bernanke's exchange with Sen. Jack Reed, a Rhode Island Democrat.

REED: ... Chairman Bernanke, I assume you're familiar with two recent reports by Moody's Analytics and Goldman Sachs which talked about the proposed House Republican budget. Their conclusion is that, if passed without modifications, there could be as much as a 2 percent decrease in the growth next year going forward and as many as 700,000 jobs lost because of the contraction of spending at the federal level.

Do you agree with those — that analysis?

BERNANKE: If that's referring to a $60 billion cut, obviously, that would be contractionary to some extent. But our analysis doesn't get a number — doesn't give a number that high.

REED: Well, the proposed cut this year is $100 billion in the House. Is that what you use for your projections going forward?

BERNANKE: We are assuming 60 (billion dollars) and 40 (billion dollars) next year which will be the 100 billion (dollars) over the fiscal year. And we also assume a normal spend-out the way — you know, the impact is not immediate, but it's spent out overtime, the reduction is effective over time.

And we get, I have to say, a smaller impact than that. I'm not quite sure where that —

REED: What is your impact?

BERNANKE: Several tenths on GDP.

REED: And jobs?

BERNANKE: I don't have that number, but it would be certainly much less than 700,000.

REED: And that is the — I just want to understand what the— the assumed cut would be in this year, because some of the things we've heard in the House proposal, it's a hundred billion dollar cut for this year.

BERNANKE: For this year.

REED: Which would be $40 billion larger than you would —that you're using as a parameter?

BERNANKE: Well, then I would multiply it, you know, by one time — you know, two-thirds greater. But I still — I still don't — I'm happy to send you our analysis, senator, but I frankly don't understand where — 2 percent is an enormous effect. Two percent of the GDP is 300 billion (dollars) right there. So assuming a multiplier of one, you know, 60 (billion dollars) to a hundred billion (dollars) is not sufficient to get to that level.
But it would, of course, have the effect of reducing growth on the margin, certainly.

REED: It would have the effect of reducing growth, which would — again, the question is how much, which will be contradicting or at least a countervailing force to your stimulus effects of QE2.

BERNANKE: To some extent, that's right. And that's why I have been trying to emphasize — and I know that this Congress will be looking at this — the need to think about the budget issue not as a current year issue, because obviously, whatever can be done — 60 billion (dollars) is not going to have much impact on the long-run imbalances in our economy and fiscal policy.

I think it's much more effective, both in terms of the short-term effects on the economy but also in terms of longer-term sustainability and confidence, to address the budget deficits over at least a 5- to10-year window, not simply within — next few quarters.

REED: Well, I agree with you. But the issue that confronts us is this year's budget and next year's budget. That's an issue dujour, literally.

MR. BERNANKE: Right.

REED: Again, my presumption is the last quarter, GDP was originally estimated at 3.2 percent, downgraded to about 2.8 percent. Is that your rough understanding, too?

BERNANKE: That's what the Bureau of Economic Analysis said, yes.

REED: And their conclusion was a lot of that was a result of contraction in spending at the state and local governments.

BERNANKE: That's correct.

REED: So I'm just wondering here, if we contract spending at the federal level, which has a ripple effect at the local level very quickly because many of the programs that we support are really run by and delegated to and staffed by state and local employees, you don't anticipate a fall-off — a significant fall-off in growth?

BERNANKE: It would have a negative impact but, again, I think the 2 percent — I'd like to see their analysis. It just seems like a somewhat big number relative to the size of the cut.

REED: And you're — again, I just want — for the record, you're assuming in this year's budget, a reduction of $60 billion from the president's proposal?

BERNANKE: Yes, that's right.

REED: That's right?

BERNANKE: Mm-hmm.

REED: And we've heard from the Republican side, the House side, a hundred billion dollars. So there's a $40 billion which you have not factored into your estimates.

BERNANKE: Is that a hundred billion in the calendar year 2011?

REED: It's fiscal year 2011, I believe.

BERNANKE: Well, that goes into next calendar year.

REED: June 30th.

BERNANKE: So talking about —

REED: Excuse me —

BERNANKE: You're talking about calendar year 2011 —

REED: No, we're talking fiscal year.

BERNANKE: Okay. Well, in terms of growth numbers, there would be a — there would be an effect this year of a tenth or two,and then there would be an additional effect in 2012, assuming that those cuts continued and also that the effects of them spread out over time beyond the fiscal year itself.

REED: Thank you.

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