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Thursday, October 20, 2005

Ben Bernanke: The Economic Outlook

Ben Bernanke gave a speech today before the Joint Economic Committee in congress. What he says is fairly predictable, the hurricanes will have short-term, but not long-term impacts on growth, the key to growth is tax cuts and effective monetary policy to stabilize prices, house prices reflect strong fundamentals, not a bubble, a slowdown in housing need not cause growth to slow below potential. He believes the trade deficit poses a challenge and the solution is to reign in the federal budget deficit, and for other countries to become less reliant on export led growth and more willing to allow their currency values to adjust. Finally, as expected, he says the solution to the budget deficit problem is to cut spending, not raise taxes:

The Economic Outlook, by Ben Bernanke, Chairman, President’s Council of Economic Advisers: ...The economy’s resilience was put to severe test during the past five years, even prior to Katrina. A remarkable range of shocks hit the U.S. economy .... Yet, in the face of all these shocks, ... the American economy has rebounded strongly.

Policy actions taken by the President and the Congress were important in helping to get the economy back on track. Notably, beginning with the President’s 2001 tax cuts, multiple rounds of tax relief increased disposable income for all taxpayers, supporting consumer confidence and spending while increasing incentives for work and entrepreneurship. Additional tax legislation passed in 2002 and 2003 provided incentives for businesses to expand their capital investments and reduced the cost of capital by lowering tax rates on dividends and capital gains. Together with appropriate monetary policies, these policy actions helped spur economic growth... Today the U.S. economy is in the midst of a strong and sustainable economic expansion... An important reason for the recovery has been improved business confidence. To an extent unusual in the postwar period, the slowdown at the beginning of this decade was business-led rather than consumer-led. ... Supported by appropriate fiscal and monetary policies and by the economy’s innate strengths, business confidence has risen markedly in the past few years. The effects are evident in the investment and employment data. ... Although growth in GDP and jobs capture the headlines, one of the biggest macroeconomic stories of the past few years is what has been happening to productivity. ... Thus, on each of three key indicators of the real economy—GDP growth, job creation, and productivity growth—the United States in recent years has the best record of any major industrial economy, and by a fairly wide margin. Finally, while there has been a notable rise in overall inflation this year, prices on non-energy products have continued to increase at moderate rates. ...

Let me turn now to the outlook. In the shorter term, the devastation wrought by the hurricanes has already had palpable effects on the national rates of job creation and output growth. ... The economic impact of the hurricanes included significant damage to the country’s energy infrastructure. ... Even as the energy sector continues to recover, it remains true that the prices of oil and natural gas have risen sharply in the past two years, ... and continued increases would at some point restrain economic growth. Thus far at least, the growth effects of energy price increases appear relatively modest. ... House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals, including robust growth in jobs and incomes, low mortgage rates, steady rates of household formation, and factors that limit the expansion of housing supply in some areas. House prices are unlikely to continue rising at current rates. However, ... a moderate cooling in the housing market, should one occur, would not be inconsistent with the economy continuing to grow at or near its potential next year. The current account deficit presents some economic challenges. ... While the current-account imbalance partly reflects the strong growth of the U.S. economy and its attractiveness to foreign investors, low U.S. national saving also contributes to the deficit. The United States should work to increase its national saving rate over time, by encouraging private saving and by controlling federal spending to reduce the budget deficit. Our trading partners must also play a role in reducing imbalances, by becoming less reliant on export-led growth and increasing domestic spending, and by allowing their exchange rates to move flexibly as determined by the market.

The economic challenges posed by hurricanes Katrina and Rita reinforce once again the importance of economic policies that promote growth and increase the resilience of the economy. ... The energy bill ... should help address the Nation’s energy needs in the longer term. As an additional step, the Administration will continue to work with Congress to take measures that will permit needed increases in refinery capacity. The Administration has made a number of other proposals to increase economic growth, including proposals to reduce the economic costs of litigation, to increase quality and reduce costs in the health-care sector, and to address national needs in education and job training. The Administration is currently engaged in several international negotiations, including the Doha round of the World Trade Organization as well as talks with China on a number of matters involving trade, exchange rates, and needed financial reforms. Liberalized trade and capital flows promote economic growth, and we should strive to achieve those objectives... It is important that we persist in these efforts and not retreat to economic isolationism, which would negatively affect the long-run growth potential of the economy. Fiscal discipline, always important, has become increasingly so ... The President remains committed to controlling spending and cutting the budget deficit in half by 2009. ... The President also remains committed to reforms to address fiscal challenges in the longer-term, such as Social Security...

I hope that, at some level, the plan is a bit more detailed than a simple we should cut programs, and that they will realize that program cuts are not enough, not politically feasible, and not the best way to solve the deficit problem.

    Posted by on Thursday, October 20, 2005 at 09:47 AM in Economics | Permalink  TrackBack (0)  Comments (11)

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