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Boston Fed chief says budgets cuts, tax hikes hurting economy

Eric S. Rosengren, president of the Federal Reserve Bank of Boston.

REUTERS/File

Eric S. Rosengren, president of the Federal Reserve Bank of Boston.

Eric S. Rosengren, president of the Federal Reserve Bank of Boston, called on Congress and President Obama to delay policies to lower the federal deficit, arguing that budget cuts and tax increases have slowed the economy and contributed to stubbornly high unemployment.

Rosengren, speaking at a conference in Milan on Thursday, said cuts in local, state, and federal spending in recent years have blunted the ­efforts of the Federal Reserve to stimulate the economy through record-low interest rates, keeping the economy from growing fast enough to lower unemployment significantly.

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Rosengren contrasted the situation to the economic recovery that began in 1982, the last time a recession pushed the national unemployment rate to 10 percent. Government spending after the economy began to recover at the end of 1982 increased by 20 percent; it has declined 5 percent during this recovery, Rosengren said.

The national unemployment rate is now 7.5 percent; at about the same point in the 1980s recovery, the jobless rate had fallen below 7 percent, according to US Labor Department statistics.

“Increased fiscal austerity in the US has weakened the outlook,’’ Rosengren said in prepared remarks. “Fiscal policy is obviously the jurisdiction of the legislative and executive branches, but given the economic realities I would urge policy makers to consider scenarios where some elements [of deficit reduction] take effect only after the economy has more fully improved.”

Policy makers use different tools to influence the direction of the economy. National governments typically use budget and tax measures, or ­fiscal policies, while central banks, such as the Fed, use interest rates, or monetary policy, to rev up or slow economic growth.

Since the end of the last recession, lawmakers, policy makers, and economists here and in Europe have debated whether cutting budgets and raising taxes to lower deficits, or increasing spending to stimulate growth, provides the best path to economic recovery. In Europe, where governments have adopted austerity policies, some nations have fallen back into recession.

In the United States, fiscal austerity has been just as severe, Rosengren noted. Automatic budget cuts known as sequestration and an increase in payroll taxes have followed local, state, and federal budget cuts since the initial burst of federal stimulus spending in the early part of the recovery, Rosengren said.

About 100 community, labor, and peace group activists protested the automatic federal budget cuts Thursday in Boston, saying they unfairly target programs that benefit preschoolers, the elderly, and AIDS patients, among others. They were joined by government workers facing layoffs because of the budget cuts.

The Fed, which has a mandate to help the economy achieve full employment, has acted more aggressively to stimulate the economy than the European Central Bank, driving short- and long-term rates to historic lows and helping the US economy to grow modestly. Rosengren noted that interest-rate sensitive industries, such as housing, are rebounding strongly.

But the recovery is advancing at a frustratingly slow pace — too slow to put the millions of Americans who lost their jobs in the last downturn back to work, even though the recession officially ended four years ago.

“It is critically important that the United States achieve a balanced and sustainable framework for government spending, but the timing is important,” Rosengren said. “Making cuts too quickly to restore balance to the federal budget deficit will have a dampening effect on near-term growth and the recovery.”

Megan Woolhouse of the Globe staff contributed to this report. Robert Gavin can be reached at rgavin@globe.com.
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