Barack Obama and U.S. Federal Reserve Board Chairman Ben Bernanke promised both much and little in their speeches on Thursday. Mr. Obama urged Congress to pass a new jobs bill to give “a jolt to an economy that has stalled,” while Mr. Bernanke said his Federal Reserve Board would do “all it can” to revive the American economy. While both men face considerable policy and political obstacles, they are charting the best courses available to them in a very bad situation.
The centrepieces of Mr. Obama’s proposal are a 50 per cut in payroll tax, to cost around $175-billion, and a $140-billion infrastructure program, all to be offset by future, unspecified cuts and tax changes. Mr. Bernanke was more circumspect, saying that the Federal Reserve has “a range of tools” that could supply monetary stimulus, but it is difficult for him to say which in advance of the Sept. 20-21 meeting of the central bank’s open market committee.
Mr. Obama was bullish and plain-spoken, showing some leadership that had eluded him in previous months. But it might be worth heeding Mr. Bernanke’s more pessimistic tone. One of the main tools available to him is a third round of quantitative easing, to put new money into the economy. In the second round, much of the newly created money went to shadow banks, which resulted in their bidding up the prices of publicly traded shares, causing an asset bubble instead of creating new credit. From the central bank, some hope now lies in “Operation Twist;” a shift of emphasis from short-term interest rates to long-term ones, giving greater incentive for longer-range investment by businesses.
One risk is that American households and lenders will make the decision – an entirely sensible one – to continue to deleverage, that is, to reduce their debts. That makes government and central bank action necessary – but it also means that those actions don’t stimulate the economy as much as they would otherwise, as people don’t spend their newly acquired money in the broader economy. That is the biggest risk of Mr. Obama’s plan, which extends and mimics tax cuts or other measures in the earlier stimulus package that failed to entirely staunch the job loss.
That said, Mr. Obama can only be bullish, even in the face of the Republicans’ obstructionism, which may sink or shrink his plan. Notwithstanding the intense politics of the debt ceiling, this is not the best time for government austerity – Mr. Obama was right to call underemployment an “ongoing national crisis.” The U.S. political establishment must now rally to end that crisis.