Fed Chair Bernanke Warns Lawmakers Sequester Could Slow Economic Recovery

Federal Reserve chairman Ben Bernanke warned Congress that the automatic spending cuts slated to take effect Friday could put a drag on economic growth. Gwen Ifill talks to economist Nariman Behravesh about whether political paralysis will affect the economy and how consumers are shrugging off Washington dysfunction.

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    The federal government moved another day closer today to $85 billion in automatic spending cuts. And as political charges and countercharges flew, Federal Reserve chief Ben Bernanke raised new fears about the potential economic fallout.

    The Fed chairman told a Senate committee that forcing across-the-board spending cuts could slice half-a-percentage point off economic growth.

  • BEN BERNANKE, Federal Reserve Chairman:

    I think an appropriate balance would be to introduce these cuts more gradually and to compensate with larger and more sustained cuts in the longer run to address our long-run fiscal issues.


    Bernanke said the sequester was supposed to be a doomsday weapon designed to spur compromise.


    It was done to be sort of like "Dr. Strangelove," you know, the bomb that goes off. So, obviously, if you can find a way to, you know — in a bipartisan way to make it more effective and better prioritized, that would be a good thing.


    Instead, the spending cuts could begin to take effect at week's end.

    President Obama, speaking at a shipyard in Newport News, Va., delivered fresh warnings today that the spending cuts would result in painful, self-inflicted wounds.


    Because of these automatic cuts, about 90,000 Virginians who work for the Department of Defense would be forced to take unpaid leave from their jobs. So that's money out of their pockets, money out of their paychecks. And then that means there's going to be a ripple effect on thousands of other jobs and businesses and services throughout the commonwealth.


    The president pressed for a compromise that combines targeted spending cuts with increased tax revenue.


    There are too many Republicans in Congress right now who refuse to compromise even an inch when it comes to closing tax loopholes and special interest tax breaks. And that's what's holding things up right now.


    The administration announced today another response to the impending cuts, the release of hundreds of detainees held at immigration detention centers. Republicans called it a ploy.

    And back at the Capitol, House Speaker John Boehner said Mr. Obama cannot be trusted.

    REP. JOHN BOEHNER, R-Ohio, Speaker of the House: Now, the American people know the president gets more money, they're just going to spend it. And the fact is, is that he's gotten his tax hikes. It's time to focus on the real problem here in Washington, and that is spending.


    Boehner complained that the president is busy holding campaign rallies while Senate Democrats do nothing. In the last Congress, the Republican-controlled House passed two alternatives.


    We shouldn't have to move a third bill before the Senate gets off their ass and begins to do something.


    Senate Majority Leader Harry Reid shot back.

  • SEN. HARRY REID, D-Nev., Majority Leader:

    I think he should understand who is sitting on their posterior. We're doing our best here to pass something. And the reason he's not bringing up something over there is because he can't pass it. He can't get his caucus to agree on anything.


    But Republican Sen. Roy Blunt of Missouri said Democrats have to face facts.

  • SEN. ROY BLUNT, R-Missouri:

    The spending cuts are going to happen. And the option now for the president is, do you want to work for a different way for these same savings to be achieved? And that's very doable.


    And Friday's is not the last deadline. Another one looms in late March, when government funding runs out.

    Now, for more on whether political paralysis in Washington is spilling over onto the economy, we turn to Nariman Behravesh, chief economist for IHS, a research and forecasting firm.

    We have heard, Mr. Behravesh, in the last couple of days, weeks surveys, polls that show that a lot of Americans to the extent they're following this story do think there's a problem here with this so-called sequester, but they don't necessarily think it's going to affect them. Are they right?

  • NARIMAN BEHRAVESH, Chief Economist, IHS Global Insight:

    Well, I think it will affect some Americans, but it's not going to have a broad impact. It will affect certain industries, for example, those that are suppliers to the defense industry.

    It might affect the airlines if there are problems with air traffic control delays or canceled flights and so on. But it will not have a broad-based effect. It will be very targeted, at least the way it's currently being proposed on some key industries, defense in particular.


    When Ben Bernanke says it will have a half-percentage — will apply a half-percentage point drag on the economy, measure what that means for us. What does that mean?


    Well, I think the good news here is that the U.S. economy is actually growing at probably about a 2 percent rate. So if the full sequester goes in and stays in place for the full year between now and the end of the year, then it's essentially what Mr. Bernanke is saying is growth will be 1.5 percent, instead of 2 percent.

    I doubt very much that's the way it's going to pan out. Eventually some kind of compromise will be worked out. But again the good news is that the U.S. consumers, U.S. businesses, are beginning to spend, are beginning to hire in the case of businesses, and that momentum seems to actually be picking up a little bit. So even in the worst-case scenario, we're not talking a recession. We're talking slower growth, which isn't good, but it's better than recession.



    Which is not good at a time when you're recovering.




    So when people look at this debate that's going on now, how do we look at it? Do we look at it long-term, short-term? Do we look at the reality or the possibility? What is the greatest, most damaging part of this?


    Well, I think the damaging part of it is that, you know, this is a very, very bad way to run a government.

    But the other reality is we have racked up a lot of debts. We do have very big deficits. We have to start cutting them. And so we — and we can't keep postponing the cuts or the tax increases, however we decide we're going to do this. It's going to hurt growth. This notion that only spending cuts hurt growth and tax increases don't is a bit of a false dichotomy here.

    However we cut the deficit, it will hurt growth. So the question is, when should we start doing it? And I think so far we have kind of postponed things. At some point the international financial market is going to lose patience with the U.S. and will punish us, basically, by raising interest rates or demanding higher interest rates.

    So, we can't keep postponing it. So, the question is, is 2013 the right time to be doing this, or should we wait another year or two? And I suspect markets will start to get impatient with the U.S. if we don't have a credible plan in place very soon.


    Well, let's talk about that credible plan. Whether there's one in place or not, certainly that is looking less and less likely by Friday, whether there's one in place at some point, what effect does it have on consumer confidence? How much does consumers' and businesses' worry about the uncertainty here become a self-fulfilling prophecy?


    You know, that's an excellent question.

    I think the good news, bad news, however you want to say it, is that consumers and businesses are beginning to shrug this off. They're beginning to shrug off the dysfunctionality in Washington. We have been through two of these episodes already. This is the third one.

    And I will give you two interesting tidbits of information. The first is today consumer confidence bounced right back after having dropped two months in a row. And those two drops were having to do with the fiscal cliff and the increase in payroll taxes. So basically consumers are shrugging this off. Maybe they shouldn't, but they are.

    The other is that the pace of hiring between the third and fourth quarter accelerated, even though U.S. businesses were worried about the fiscal cliff. So I suspect this next round, in terms of the sequester, a lot of businesses again will sort of say, oh, there's Washington at it again. So the good news is right now at least, it doesn't seem to be affecting business and consumer confidence that much.


    So, you're saying when we look at these serial showdowns, whether it's the threat of a government showdown or a fiscal cliff or this sequester or another round at the end of this month, people are shrugging it off, rather than saying — getting hopelessly paralyzed by it themselves, that is, the individuals and the private business?


    Well, undoubtedly, some businesses, those that are in the crosshairs, if you will, of the sequester, and, you know, people who are worried about losing their jobs are paralyzed or are taking actions. I'm not saying nobody is.

    But if you look at the economy as a whole, the evidence is that, as each of these showdowns, as you call them, sort of passes and nothing horrible happens, there's a tendency on the part of businesses and consumers to say, you know, here we go again. Oh, well.

    I mean, again, I know I'm being a little facetious, but I think that's what we're seeing right now.


    Nariman Behravesh of IHS, thank you so much for helping us out.


    Thank you.