The economy is growing moderately and employment has picked up recently, but growth continues to be held back by budget constraints, Federal Reserve Chairman Ben S. Bernanke testified Wednesday.
Budget cuts and tax increases at all levels of government have exerted a powerful drag on the economy throughout the nearly four-year-long expansion, helping to make it sub-par by historical standards, he told the Joint Economic Committee.
The economy has lost a total of 800,000 government jobs, mostly as a result of deep budget cuts by state and local governments since 2009, he said. While the federal government provided substantial stimulus to the economy from 2009 to 2011, more recently budget slashing by the Congress also has been weighing on growth, he said.
The Fed chairman urged Congress to ease up on the current round of $85 billion of across-the-board spending cuts being imposed on the bureaucracy this year, and replace it with reforms aimed at reining in long-term spending on fast-growing entitlement programs such as Medicare and Medicaid.
"Although near-term fiscal restraint has increased, much less has been done to address the federal government's longer-term fiscal imbalances." he said. It would be better for the economy to "replace some of the near-term fiscal restraint now in law with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run."
Mr. Bernanke also endorsed bipartisan tax reform as a good way to instill confidence in businesses and the economy and promote growth through lower tax rates. But the difficult part, he said, would be to cut or eliminate popular tax deductions for mortgages, health insurance, charities and other areas that have powerful constituencies, to pay for the rate reductions.
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