Bernanke: Far too Early to Call Victory in Recovery

Federal Reserve Chairman Ben Bernanke said on Tuesday it is too soon to declare victory in the U.S. economic recovery, warning against complacency in policy making as the outlook brightens.
"We haven't quite yet got to the point where we can be completely confident that we're on a track to full recovery," Bernanke told ABC News in a rare on-the-record interview.

The Fed chairman welcomed a decline in the unemployment rate and signs financial strains in debt-stricken Europe were easing. But he said joblessness was still at a troubling high and housing markets still weak.
"I think it's really important not to be complacent. We have a long way to go, a lot of work to do, and we're going to keep doing that."

Asked whether the Fed was considering further action to stimulate growth, Bernanke said the central bank would take no options off the table. However, he did not suggest a further round of bond buying was imminent.

The Fed has kept interest rates near zero since December 2008 and has bought $2.3 trillion of debt through two bond-purchasing programs to stimulate growth.
In a speech on Monday, Bernanke said the U.S. economy would need to grow more quickly to ensure continued progress in reducing the jobless rate. Those comments drove stock prices higher as investors bet a further round of monetary stimulus might be planned.

Stocks rose Monday on optimism Bernanke's remarks signaled the Fed will do more to lower borrowing costs. Traders pushed out bets for a first Fed rate hike to October 2013, from July 2013 just a week earlier.
The U.S. unemployment rate has dropped from 9.1 percent in August to 8.3 percent last month, a decline Fed officials see as out of step with a still-sluggish pace of growth.

Dallas Federal Reserve Bank President Richard Fisher, a monetary policy hawk, on Tuesday agreed that faster growth is needed to boost jobs, although he made clear he is opposed to a further easing of monetary policy.

Eric Rosengren, a policy dove who leads the Boston Fed, said the central bank should ease further if growth slows more than expected. Neither official has a vote this year on the Fed's policy panel.
Another official who is supportive of loose monetary policies, New York Fed President William Dudley, told a congressional panel financial strains in Europe have eased although the Fed continues to monitor the situation carefully.

After its last two meetings, the Fed said it would likely keep overnight borrowing costs near zero at least through late 2014. Bernanke said that was the central bank's best estimate, not a guarantee.

A quickened pace of job creation - the economy has created more than 200,000 jobs in each of the last three months - has fueled speculation the central bank might raise rates sooner.
In both his speech on Monday and the interview on Tuesday, Bernanke appeared to be pushing back against those expectations.

"It's far too early to declare victory," Bernanke told ABC News. "We need to be cautious and make sure this is sustainable."

One drag on growth is likely to come from gasoline prices that have drifted higher on geopolitical worries, Bernanke said.

"That will be a hit on growth," he said. "But at this level ... we don't think it's going to be anything that's going to stall the recovery."

Rising fuel costs are shaping up as one of the biggest issues in the 2012 presidential campaign, as U.S. gasoline prices have jumped about $0.30 per gallon to just over $3.90 within the past month.
Bernanke's ABC News appearance marks the third time the Fed chairman has given an extensive on-the-record, on-camera interview. It was part of a barrage of recent public exposure that has included a profile in a national magazine and a series of college lectures on the Fed and the recent financial crisis.

Bernanke's stepped-up visibility, on top of the launch of news conferences four times a year, appears aimed at counter-balancing some of the harsh criticism leveled at the Fed by Republican presidential candidates. Critics say the Fed's policies have weakened the dollar, hurt savers, and are likely to generate inflation.


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The Art of Tax War - Economics Theory

The highly charged partisan debate over the future of the Bush tax cuts (scheduled to expire at the end of December) is a kind of war. Whether you term it a class war depends on what you mean by class, but it is certainly a war between the very rich (the top 2 percent of income earners) and a host of other individuals allied with them, against everybody else who gives a darn.

Battlefield success will be largely determined by the outcomes in the coming Congressional elections. A key issue in these races will be public perceptions of President Obama’s proposal to let expire the federal income-tax cuts put in place by the Bush administration for the very rich, while maintaining those tax cuts – and others implemented by his administration – for everybody else.

Voters’ perceptions are not primarily driven by facts. A February CBS poll showed that only 12 percent of voters recognize that the Obama administration has cut taxes. About 24 percent of voters (and about 64 percent of Tea Party supporters) said they believed it had raised taxes.

Many explanations come to mind. The tax issue is often a lightning rod for other frustrations. Most people find discussions of tax policy complicated and boring, and highly charged partisan debates excite some, but upset others, discouraging them from learning more.

The dynamics of collective conflict also come into play. Precisely because they are such a small group, the very rich stand to lose much more per person than others will gain per person from increased tax revenues. They also have more resources to invest in the fight, enabling them to make bigger contributions to Congressional campaigns.

One important strategic goal of this camp is to persuade voters that tax increases at the top will hurt the economy as a whole. Here’s where supply-side economics comes in, with its claims that tax cuts increase revenues and promote economic growth.

Historical trends, including a comparison of trends during the Clinton and Bush administrations, do not support these claims. But in a world in which most people believe their livelihoods depend on rich investors, many people are fearful. As Brit Hume of Fox News put it on July 25, “When’s the last time one of these poor people offered you a job?”

As a corollary, it is strategically important to argue that increased taxes at the top will hurt small business owners, who are generally more liked and better respected than individuals in the economic stratosphere. But as William Gale of the Urban Institute explains, very few small-business owners are in the top 2 percent, and most individuals in that category don’t heavily rely on business income.

In a counterattack, a group called Business and Investors Against Tax Haven Abuse has released a report arguing that corporate tax havens provide an unfair advantage to large chain retailers and financial companies over locally owned retailers and community banks.

This report doesn’t speak directly to the issue of federal income taxes, but nonetheless lands some relevant blows. Apparently Goldman Sachs, taking brilliant advantage of offshore tax havens in 2008, paid federal taxes at an effective tax rate of 1 percent, proffering a sum less than one-third what it paid its chief executive, Lloyd Blankfein.

It seems unlikely that taxing Mr. Blankfein himself at a higher rate would cause any harm.

Another strategic goal of opponents of the tax increase is to split and weaken the coalition favoring it. In this context, it is advantageous to label those receiving public assistance (including unemployment insurance) as slackers and cheats. About 47 percent of Americans owed no federal income tax in 2009, which you might think people opposed to federal income taxes would consider good news. Instead, the conservative radio commentator Rush Limbaugh characterized this as a form of fraud, “worse than anything Bernie Madoff ever thought about doing.”

On the battlefield, in the fog of war, it is often difficult to know exactly what is happening, and why. But those resisting change have the most to gain from fog – or even from blowing smoke – because uncertainty often works in favor of the status quo.

In my view, Citizens for Tax Justice, which describes itself as an advocacy group that strives “to give ordinary people a greater voice” against the “armies of special interest lobbyists for corporations and the wealthy,” offers the most specific and well-documented analysis of the two competing approaches to the Bush tax cuts, those of President Obama and the Congressional Republicans. Unfortunately, it doesn’t seem to have gotten much attention from the news media.

I’m not sure whose fault that is, and if Sun Tzu were alive today, I’m not sure whom he would be working for. But it’s pretty clear that the Republicans would offer him a higher salary.

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