4 Ways Congress Could Screw Up the Economic Recovery
Speaking before Congress last week, Chairman of the Federal Reserve Ben Bernanke made it clear that the responsibility of ensuring long-term economic growth in the United States was not the job of monetary policy. The tools available to the central bank are appropriately referred to as stimulants: low interest rates and quantitative easing can provide a short-term boost to economic activity, but Bernanke and the FOMC board do not control the long-term economic environment.
That responsibility rests largely with fiscal policy, which is the ward of Congress. As Bernanke put it in his testimony, monetary policy does not have the capacity to offset the economic headwinds created by restrictive fiscal policy. Over the past year, sequestration spending cuts, the effects of the debt ceiling, tax increases, and the expiration of tax cuts has created an economic drag that the Congressional Budget Office expects to slow the rate of economic growth by 1.5 percentage points relative to what it would have been otherwise.
What this all points to is the fact that the Fed is doing its job: it has opened the monetary fire hose and is pumping liquidity into the market. The problem is that the economy is full of holes and is leaking fuel just about as fast as the Fed can pump it in, and patching those holes is the job of policymakers in Washington.
Let’s take a look at a few ways that Congress could drop the ball.