Fed’s Bernanke: GOP Budget Ax Won’t Hurt Economy

Federal Reserve Chairman Ben Bernanke threw budget-cutting Republicans a lifeline Tuesday, telling Congress that the GOP’s proposed $61 billion in budget cuts would have a negligible impact on the economy and unemployment.

Bernanke’s testimony stands in direct contrast to two earlier reports by Goldman Sachs and pro-stimulus economist Mark Zandi, which both warned a reduction in federal spending could cause major damage to the economy.

Zandi, in fact, predicted that GOP budget cuts could cost 700,000 jobs. Bernanke says the Fed’s model show the number of jobs lost would be far less than that.

Ben Bernanke

Lower spending, Bernanke told senators, would only affect “growth on the margins.” He said it could cut GDP by one- or two-tenths of a percentage point.

Republican leaders hope Bernanke’s testimony to the Senate Banking and Urban Affairs Committee will squelch the Democratic talking point that any reductions in federal spending would force hundreds of thousands of workers onto the unemployment rolls.

Bernanke was especially critical of a recent Goldman Sachs analysis that GOP spending reductions could cut GDP by as much as 2 points in the second and third quarters of this year.

“Two percent is enormous and would be based on $300 billion in cuts,” Bernanke told the panel. “Sixty billion to $100 billion isn’t sufficient to create that kind of effect.”

Democrats have been pointing to the Goldman Sachs and Zandi reports, to argue that GOP budget cutting would stall the economy.

Bernanke also encouraged senators to reform the tax code, and said the debt ceiling must be raised in coming months to fund ongoing government operations.

"Not increasing the debt limit is like saying you're going to solve your family's debt problems by not paying your credit card bills," Bernanke said.

Bernanke also told the senators that the rising cost of oil does not yet pose a major threat to the economic recovery.

But he warned that, “Sustained rises in the prices of oil or other commodities would represent a threat both to economic growth and to overall price stability.”