Consumers are not spending enough and businesses are not investing enough to put a big dent in unemployment, Federal Reserve Chairman Ben Bernanke said Monday.
For the past year, hiring trends have been encouraging; in the past three months, the economy has added roughly 250,000 jobs per month. But the jobless rate remains stubbornly high at 8.3 percent and long-term unemployment remains stuck at the highest levels in more than 50 years.
Some economists have blamed part of the shortfall on the impact of globalization and rapid advances in technology that have made many jobs obsolete, leaving workers with outdated skills and not well-matched to the jobs that are open.
But Bernanke said at a meeting of the National Association for Business Economics that slack demand may be the bigger cause of the weaker-than-normal hiring more than two years into a recovery.
“The fact that labor demand appears weak in most industries and locations is suggestive of a general shortfall of aggregate demand rather than a worsening mismatch between skills and jobs," he said.
After nearly two years of job gains, private payroll employment remains more than 5 million jobs below its previous peak, Bernanke noted. “The jobs shortfall is even larger when increases in the size of the labor force are taken into account,” he said.
Bernanke’s speech kicked off a two-day meeting of NABE devoted to discussions about whether government policies are doing all they can to get the pace of job growth and the broader economic recovery back on track.
The annual conference is exploring the government response to the worst financial crisis since the Great Depression – and how well current policies are helping convert a feeble U.S. recovery into another period of sustained economic growth.
Though the economy has perked up, Bernanke is among those who believe demand from consumers and businesses may not be strong enough to keep the expansion going. Last week, he told a group of George Washington University students that the pace of spending and investment is still too sluggish to sustain the recovery. The Fed chairman noted that consumer demand remains weak relative to its level before the Great Recession and that other contributors to economic growth including borrowing and trade have declined.
"Consumer spending has not ... recovered. It's still quite weak relative to where it was before the crisis," Bernanke said in the second of four lectures he is giving to GWU students this month. "We lack a source of demand to keep the economy growing."
Until those demand forces kick in, the economic outlook will depend heavily on government fiscal and monetary policy, which consists mainly of the Fed's efforts to keep the cost of borrowing low.
Following the financial Panic of 2008, Congress and the White House, beginning in the last days of the Bush administration, rushed to stimulate the economy out of recession with tax cuts and heavy spending to bail out banks and prevent the U.S. auto industry from cratering. Those policies are widely believed to have helped prevent the onset of another Great Depression, but they added to an already swollen national debt. Now the debate has turned to the question of how soon and how aggressively the government should cut spending, raises taxes or use some combination of both to balance the federal budget.
Like most questions put to economists, there’s not much agreement about whether Congress and the White House are getting it right. Opinion is pretty well split along Goldilocks lines: about a third think taxes and spending are more stimulative than they need to be to get the economy moving again on its own; another third think taxes and spending are too restrictive to help boost growth; and a third think current fiscal policy is just right.
Like most businesses and voters, though, the group generally thinks the tax code is ready for an overhaul. Most think it’s a good idea to continue giving consumers a little extra money to spend with the current payroll tax break, at least though 2012. A smaller majority also think it’s a good idea to continue providing emergency jobless benefits for the long-term unemployed, although they also think those benefits might keep the unemployment rate higher than it would otherwise be.
Though fairly evenly split on fiscal policy, the economists give the Fed fairly good marks on monetary policy. A slight majority agree that Fed policy is “about right,” and most expect interest rates to remain at current rock-bottom levels for at least the rest of this year. They also generally believe the Fed did the right thing with its massive purchases of bonds to try to hold down interest rates on long-term loans like mortgages. But most say that policy has run its course and shouldn’t be renewed with more bond-buying.