Fed chairman Ben Bernanke made it official this morning: He thinks it would be a good idea for Congress to approve some sort of fiscal stimulus package to aid the ailing U.S. economy this year. And for a guy who tries really hard to avoid taking the sort of political stands that his predecessor Alan Greenspan did, Bernanke made it strikingly clear that he disagrees with the argument put forward by some Republican lawmakers that any stimulus package should include the extension of President Bush’s tax cuts, most of which are set to expire after 2010.
“I agree that fiscal action could be helpful in principle, as fiscal and monetary stimulus together may provide broader support for the economy than monetary policy actions alone,” Bernanke told the House Budget Committee. But his approval was conditioned on just what form that fiscal action takes:
[A]ny program should be explicitly temporary, both to avoid unwanted stimulus beyond the near-term horizon and, importantly, to preclude an increase in the federal government’s structural budget deficit. As I have discussed on other occasions, the nation faces daunting long-run budget challenges associated with an aging population, rising health-care costs, and other factors. A fiscal program that increased the structural budget deficit would only make confronting those challenges more difficult.
So what does that leave? Mainly the things that Congressional Democrats have been talking about: A one-time tax rebate, an extension of unemployment benefits, temporary aid to the states, an increase in food-stamp benefits. (The Congress Budget Office published a 35-page pdf rundown of the possibilities Tuesday.) These are all measures designed not to change people’s incentives or long-run behavior, but simply to shove more money into Americans’ pockets during an economic tough spot. It is, thus, an entirely Keynesian approach.
Which is interesting, because Bernanke is a Republican appointee, and Republican economic rhetoric of the past 30 years has generally denied that Keynesian economics works at all.
A core assumption of Keynesianism is that people are short-sighted and a little stupid. Throw some money at them–even if you’re planning to take it back later in the form of higher taxes–and they’ll go out and spend it.
Starting in the mid-1970s, as the Keynesian economic policies then embraced by both parties seemed to founder, a few Republican rebels (the supply-siders) began arguing that, in fact, people are pretty forward-looking, and economic policy should be about creating long-term incentives for work and investment–mainly by permanently reducing the taxation of both. This has since become Republican orthodoxy.
But the dirty little secret is that the serious economists who work in Republican administrations, while they generally agree with that long-term approach, still think there’s something to Keynesianism too. (Greg Mankiw, Bernanke’s predecessor as the chairman of President Bush’s Council of Economic Advisers, even used to have a dog named Keynes.) They believe that over the short-term people can be short-sighted and stupid enough to respond to temporary fiscal stimulus, and that using such stimulus to ease or avert recession is a good idea. They generally keep such opinions to themselves while they’re in Washington, or they hide them somewhere deep in the annual Economic Report of the President.
Now, though, Ben Bernanke is in a nominally nonpartisan job and is saying what he thinks. Which is that temporary stimulus can work, and that Republican claims that extending the Bush tax cuts years into the future would help the economy now are bunk.
Update: Now President Bush has joined the club.