Federal Reserve Chairman Explains Why Looming Budget Cuts Could Be Bad News For Deficit Reduction

Budget cuts under the so-called “sequester” will go into effect on Friday. Independent estimates shows that the cuts will cost anywhere from 700,000 to 750,000 jobs. And the end result may be very little deficit reduction as well, as a more depressed economy will not produce as much in the way of revenue, as economist Adam Hersh explained.

During a hearing before the House Financial Services Committee today, Federal Reserve Chairman Ben Bernanke patiently tried to explain this to Rep. Sean Duffy (R-WI), who wasn’t having it:

DUFFY: Instead of encouraging responsibility, you come in and say “listen to cut 2 percent of our budget, you can’t do it. It’s going to have a great impact on our economy.” Mr. Chairman that doesn’t make sense to me.

BERNANKE: Well, I think most economists, including the CBO, would say this will cost a lot of jobs in the short run. And you can achieve the same results with longer-term programs. […]


DUFFY: So then are you here telling us if we cut $85 billion in a more reflective way — in the bad spending that I just referenced — you would support it? It’s a good idea if we’re not doing it by way of the sequester, but we had a little more reflective analysis on the $85 billion.

BERNANKE: It would be better.

DUFFY: So is it better or you agree with us that we should actually reduce spending?

BERNANKE: I’m still concerned about the short-term impact on jobs. And you don’t get as much benefit as you think, because if you slow the economy that hurts your revenues and that means your deficit reduction is not as big as you think it is.


For evidence of what Bernanke is talking about, one needs to look no further than Europe, where austerity — rather than sparking a recovery — has led to weak growth, high unemployment, and yes, more debt. In fact, the EU’s debt “was barely changed at 90 percent of gross domestic product in the third quarter of 2012 compared with 89.9 percent for three months earlier…It was up from 86.8 percent of GDP a year earlier,” even after the continent embraced deep spending cuts and reforms.