OK, I know it's a foolish rhetorical question. But it really seems as though Congressional Republicans aren't even trying to make sense any more. Today's episode takes us to the Joint Economic Committee, where Fed Chair Ben Bernanke is giving his periodic testimony on the economic outlook and monetary policy.
In his testimony, Mr. Bernanke described the limitations of the ability of monetary policy (interest rates and money supply) to stimulate growth, citing headwinds from fiscal policy (taxation and government spending):
Most recently, the strengthening economy has improved the budgetary outlooks of most state and local governments, leading them to reduce their pace of fiscal tightening. At the same time, though, fiscal policy at the federal level has become significantly more restrictive. In particular, the expiration of the payroll tax cut, the enactment of tax increases, the effects of the budget caps on discretionary spending, the onset of the sequestration, and the declines in defense spending for overseas military operations are expected, collectively, to exert a substantial drag on the economy this year. The Congressional Budget Office (CBO) estimates that the deficit reduction policies in current law will slow the pace of real GDP growth by about 1-1/2 percentage points during 2013, relative to what it would have been otherwise. In present circumstances, with short-term interest rates already close to zero, monetary policy does not have the capacity to fully offset an economic headwind of this magnitude.In other words, Mr. Bernanke repeated his consistent position that the Fed is doing about all it can, and if Congress wants to see a stronger economy, it has to take some responsibility itself.
Cue the apparently hard-hitting questions from the committee, leading off with its Chair, Representative Kevin Brady (R-TX). Mr. Brady stood on his hind legs and "challenged" Mr. Bernanke regarding the efficacy of monetary policy, asking why the Fed continues its extraordinarily easy policy when it isn't fixing what ails the economy. Never mind that Mr. Bernanke had just finished saying that there's only so much that monetary policy can do, or that he has consistently argued that the Fed's policies have prevented what could have been a catastrophic deflationary spiral.
Today's hearing isn't Mr. Bernanke's first rodeo, though, so he took Mr. Brady's question in stride. Rather than saying, "I just talked about that, you moron," Mr. Bernanke calmly rehearsed a litany of headwinds to economic growth, including, of course, the end of the payroll tax cut and the sharp reductions in federal spending under the sequester.
Mr. Bernanke's response, which didn't surprise anyone that's been paying attention, appeared to knock Mr. Brady back on his heels, but he made what I'm sure he thinks was a snappy recovery, saying that well, why doesn't the Fed give up all this monetary easing? That would put the screws to Congress to address the fiscal issues.
Mr. Brady and the other Republicans on the Committee appear to be 75 years out of date. They seem to have the view that if the Fed tightens monetary policy, then that will force Congress to act -- but in their world, Congressional action would mean further fiscal tightening. Let's imagine the possible results. Monetary tightening leads to deflation. Fiscal tightening causes a drop in gross domestic product. The combination leads to drops in consumer spending (after all, if that discretionary purchase is going to be cheaper in six months, and you aren't really sure about your job, wouldn't you wait?). The economy slows further, and the employment picture becomes even worse. The stock market maybe takes another sharp downturn, as in 1937 when Congress balanced the budget and the Fed increased interest rates. In the end, Congressional Republicans and their sponsors become Gatsby-like tycoons, and the rest of us are passing canapes at their parties. But that's how we work all this imagined excess out of the economy.
Perfect outcome, right?