Bernanke: Spending cuts won’t boost jobs

June 23, 2011

By Patrice Hill, The Washington Times

Federal Reserve Chairman Ben S. Bernanke on Wednesday rejected an argument frequently made by Republican deficit hawks that immediate, deep cuts in federal spending will help produce jobs.

The Fed chairman said at a news conference that — to the contrary — cuts in spending at the state and local level, combined with the withdrawal of stimulus spending at the federal level, contributed to the slowdown in job growth and economic growth seen this year.

“I don’t think that sharp, immediate cuts in the deficit would create more jobs,” he said. “Deficit reduction is at best neutral for job-creation.”

State and local governments have eliminated close to a half-million jobs since the recession, according to the Bureau of Labor Statistics. Those job losses originally were fed by gaping budget gaps in most states and now are being fed in part by the loss of federal stimulus funding. The government job cuts have partially offset robust job growth in the private sector this year of close to 200,000 a month on average.

To avoid generating more job losses, Mr. Bernanke stressed thatCongress and the White House should aim to reduce the deficit gradually over several years particularly through reforms in entitlement-spending programs such as Medicare and Medicaid which have been growing rapidly and pose the greatest threat of destabilizing the government’s finances.

“The most effective way to address fiscal problems is to take a long-range perspective,” he said.

Republicans have argued that slashing federal spending will create jobs by reducing the government burden on the private economy. That argument has resonated in opinion polls which show public support for taking that approach. But the party dogma runs counter not only to Mr. Bernanke’s advice, but the counsel of most economists.

In his second-ever public press briefing following a meeting of the Fed’s monetary policy committee, Mr. Bernanke also said for the first time that an explosion of the European debt crisis could trigger another global financial rout that would pull down the U.S. economy. He said the Fed is prepared to react with more easing measures if that happens.

“An disorderly default [by Greece] would no doubt roil financial markets globally and would have a significant effect on the U.S.,” he said.

Greece’s parliament on Tuesday averted the possibility of an immediate default by upholding the Socialist government and its economic-austerity program in a vote of confidence. That enables the International Monetary Fund and the European Union to continue lending to the country.

But analysts say Greece most likely is headed toward a debt restructuring at some point, because its debts have become unsustainable while the austerity program has thrown the country into a deep recession.

Mr. Bernanke called Greece’s troubles a “very difficult situation.” The Fed has surveyed U.S. banks to determine how exposed they would be to a default by Greece, he said, and found that most U.S. banks have little direct exposure.

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1 Comment - what are your thoughts?

  • 2nd Supporter says:

    Whoa! Apples and Oranges here! Calls for spending cuts were NEVER ever implied to boost jobs growth by Repubs. Spending cuts are meant to try to reign in the crushing debt this Administration has racked up to the tune of Trillions of Dollars. Ask Bernanke how much he made from G-S and Lehman Bros mishap… eh all I hear is silence.

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