Bernanke Cautions

Today’s speech by Ben Bernanke has caught quite a bit of attention. So it should. His basic argument is that it far too soon to declare victory in this recovery. Job growth is way too small each month. Moreover what growth there has been is more a function in the reduction of firing than in a surge in new hiring. The economy is simply not generating new jobs at anywhere near fast enough a pace for us to get to sustainable growth any time soon.

We are seeing a significant pick up in activity attributable to a release in pent up demand. That is normal and points to greater confidence on the part of consumers. But it is not enough to fuel a fully fledged recovery with GDP growth sufficient to close the gap between potential activity and our actual activity. That means there is a pool of idle resources sitting around unused, with much of that being unemployed labor.

Bernanke was firing a shot in what appears to be the early stages of a fight against the austerity crowd’s next attempt at retrenchment. The economy is simply not strong enough to carry the burden of cuts in spending. We only have to look at the damage being wrought across Europe to see that the entire notion of austerity driven growth is a complete farce. We, that is to say you and I, never thought it was possible to create growth by cutting spending. Unfortunately there are those, many in very significant jobs, who believe in such nonsense. The Euro experience of the past two years has thoroughly debunked growth austerity, but it clings on due to its ideological strength: it supports a far right economic agenda and works very well in the rarified atmosphere of orthodox economics models. But a cut in spending is a cut in spending and so shrinks the economy. The supposed offsetting surge in confidence, which, in turn, triggers a surge in investment and consumption, hasn’t turned up anywhere where true austerity has been enforced.

Still, Bernnake is concerned enough about the state of our politics that he deemed it necessary to fire this shot across the bows of those who might imagine that the economy is now recovered enough to take a battering.

He is right.

We remain far short of our goal. This is not the time for cuts. Indeed it is more a time for a another dose of medicine.

That we won’t get.

So all we can do is cling on to what we have and make sure the hawks don’t ruin it for us.