Over the last year, the American public has been inundated with conservative austerity arguments. Medicaid and Medicare needed to be reined in (or handed over to the states entirely, according Paul Ryan), unemployment insurance was, at times, too costly a burden for the nation, and even heating oil subsidies to poor families had to be cut if the economy was going to rebound. All of this formed to core of the Republican economic orthodoxy. Cut to stimulate was the motto and everything else was deemed voodoo economics.
We still hear these arguments anymore, but they are not as loud as before. Maybe one reason is that the economy is growing based on a theory that was exactly the opposite of austerity: Bernanke-style stimulus.
Bloomberg.com reported yesterday that Wall Street types and conservative economists are backing off their criticism of Bernanke, who in his term as Fed chairman pursued full employment instead of debt reduction and reigning in inflation. They have good reason. The US economy, already reporting growth of 1.8 percent in the 3rd quarter of 2011, is predicted to grow at a rate of 2.3 percent this year. Meanwhile, European governments, which have truly taken to austerity, may only grow at .3 percent -- and that's if the euro zone doesn't experience its second recession in three years.
Republicans would like to claim some of the applause for this impending growth, but the truth is that they deserve none of it. Ex-presidential candidate Rick Perry called Ben Bernanke's actions "almost treasonous" and, playing to popular frustration with a slow recovery, GOP front-runners Romney and Gingrich have said they wouldn't keep the Fed Chairman past his current four-year term. And Congress, while less pronounced in their public denunciations, did everything in its power to slow additional recourse to stimulus, including the best parts of President Obama's Jobs Bill.
In this climate, Bernanke pursued policies that were within his discretion, including engaging in over $600 billion of bond transactions and swapping out $400 billion in short term debt for longer treasuries when unemployment began rising again in late 2010. Both of these moves were meant to keep more money flowing through the economy by holding interest rates down and encouraging borrowing so that others might invest. Conservative economists contended that such policies would further indebt the country and, worse, encourage the same bad consumption habits that had led to the housing bubble and collapse. But Bernanke persisted in believing that the macroeconomy can be pushed and tugged in ways that are beneficial.
The result: The lowest unemployment rate in three years.
Steven Bell, author of a critical 2008 report "Ben's Big Gamble" and chief economist at hedge fund GLC, ltd., now believes that history will look upon Ben Bernanke favorably. That would seem to be an understatement if, as some analyses demonstrate, Fed policies helped stave off a second economic collapse. The more interesting observation is that he was able to pull it off in the midst of unthinkable national gridlock.
Conservatives like George Will and Joe Scarborough love to argue that gridlock produces better outcomes because it pulls legislation from the extremes of either ideological poll. But in this case, there was no moderation or consensus policy brought on by gridlock. House Republicans held the purse strings and the fate of the country, and were unwilling to negotiate fair terms with the President or the Democratic Senate, even though the country desperately needed to act with certitude. And what did that get us? GOP, and especially Tea Party, obstinacy brought on the first credit downgrade in U.S. history, a harsh and unnecessary blow to a sputtering economy. As the today's economix blog reveals, this isn't the worse that a combination of austerity and obstinacy can accomplish, but it is still pretty bad.
In this climate, Ben Bernanke acted and seems to have persevered. If things continue on their present trajectory, American citizens will be privileged enough not to face a Japanese-style lost decade, but instead a decade of reasonable growth brought on by Mr. Bernanke's certitude and perseverance. And the only question that will be left about his leadership is how effective could he have been if austerity had not been in the national lexicon?