Fed Chairman: The Economic Recovery and Economic Policy

Link to Bernanke's recent speech at the New York Economic Club (Hat tip Wilwon). Some interesting tid-bits:

Policymakers in Europe have taken some important steps recently, and in doing so have contributed to some welcome easing of financial conditions. In particular, the European Central Bank's new Outright Monetary Transactions program, under which it could purchase the sovereign debt of vulnerable euro-area countries who agree to meet prescribed conditions, has helped ease market concerns about those countries.

A third headwind to the recovery--and one that may intensify in force in coming quarters--is U.S. fiscal policy. Although fiscal policy at the federal level was quite expansionary during the recession and early in the recovery, as the recovery proceeded, the support provided for the economy by federal fiscal actions was increasingly offset by the adverse effects of tight budget conditions for state and local governments. In response to a large and sustained decline in their tax revenues, state and local governments have cut about 600,000 jobs on net since the third quarter of 2008 while reducing real expenditures for infrastructure projects by 20 percent.

More recently, the situation has to some extent reversed: The drag on economic growth from state and local fiscal policy has diminished as revenues have improved, easing the pressures for further spending cuts or tax increases. In contrast, the phasing-out of earlier stimulus programs and policy actions to reduce the federal budget deficit have led federal fiscal policy to begin restraining GDP growth. Indeed, under almost any plausible scenario, next year the drag from federal fiscal policy on GDP growth will outweigh the positive effects on growth from fiscal expansion at the state and local level. However, the overall effect of federal fiscal policy on the economy, both in the near term and in the longer run, remains quite uncertain and depends on how policymakers meet two daunting fiscal challenges--one by the start of the new year and the other no later than the spring.

What are these looming challenges? First, the Congress and the Administration will need to protect the economy from the full brunt of the severe fiscal tightening at the beginning of next year that is built into current law--the so-called fiscal cliff. The realization of all of the automatic tax increases and spending cuts that make up the fiscal cliff, absent offsetting changes, would pose a substantial threat to the recovery--indeed, by the reckoning of the Congressional Budget Office (CBO) and that of many outside observers, a fiscal shock of that size would send the economy toppling back into recession. Second, early in the new year it will be necessary to approve an increase in the federal debt limit to avoid any possibility of a catastrophic default on the nation's Treasury securities and other obligations. As you will recall, the threat of default in the summer of 2011 fueled economic uncertainty and badly damaged confidence, even though an agreement ultimately was reached. A failure to reach a timely agreement this time around could impose even heavier economic and financial costs.

As fiscal policymakers face these critical decisions, they should keep two objectives in mind. First, as I think is widely appreciated by now, the federal budget is on an unsustainable path [Ed: metaphor]. The budget deficit, which peaked at about 10 percent of GDP in 2009 and now stands at about 7 percent of GDP, is expected to narrow further in the coming years as the economy continues to recover. However, the CBO projects that, under a plausible set of policy assumptions, the budget deficit would still be greater than 4 percent of GDP in 2018, assuming the economy has returned to its potential by then.

A credible framework to set federal fiscal policy on a stable path [Ed: metaphor]--for example, one on which the ratio of federal debt to GDP eventually stabilizes or declines--is thus urgently needed to ensure longer-term economic growth and stability.

Coming together to find fiscal solutions will not be easy, but the stakes are high. Uncertainty about how the fiscal cliff, the raising of the debt limit, and the longer-term budget situation will be addressed appears already to be affecting private spending and investment decisions and may be contributing to an increased sense of caution in financial markets, with adverse effects on the economy.

In addition to announcing new purchases of MBS, at our September meeting we extended our guidance for how long we expect that exceptionally low levels for the federal funds rate will likely be warranted at least through the middle of 2015. By pushing the expected period of low rates further into the future, we are not saying that we expect the economy to remain weak until mid-2015; rather, we expect--as we indicated in our September statement--that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.13 In other words, we will want to be sure that the recovery is established before we begin to normalize policy.

I can see that Bernanke here in key instances has no ability to discern contradiction and relies on use of metaphor to describe his vision of some very important economic ex-post data.

He first makes the case that we need accommodative fiscal policy to avoid a economic contraction with current deficts coming in at 7% of GDP, but then immediately claims that we need to "reduce the deficit", implying to a point below 4% of GDP (which btw is impossible) in order to ensure long term growth and stability... this is a manifest inability to discern contradictory statements.  This is revealing and calls into question his basic intelligence.

He also uses two metaphors to describe two visions for fiscal policy: "unsustainable path" and "stable path".  You hear and read these two metaphors, in fact for the first one, these exact words, repeated a lot coming from the Peterson people and indeed, bandied about back and forth and between the morons in general.

This is apparently a VERY POWERFUL semantic word pattern that when dispensed, possess some sort of ability to mesmerize or enchant many of the weak minded among us.   "Unsustainable path"....  it has no effect on me ;)  .

The second one "stable path" I don't hear that one as much, typically the morons will say "sustainable path".  Perhaps by using "stable path", Bernanke is revealing that at some mentally minimum level he realizes that the fiscal deficit in the present era will always have to remain in deficit for the foreseeable future, but does not get the math beyond that it must be non-zero.

If so, here's hoping he can straighten himself out on this.