Bernanke: Don’t Fix The Deficit Now, But Don’t Wait Too Long Either

At the Annual Meeting of the Rhode Island Public Expenditure Council, Providence, Rhode Island, Fed chief Ben Bernanke continued to say that the federal deficit is a threat which grows by the day and could ruin the long-term health of the economy. He would like the threat removed. He is simply not clear about the timing.

Bernanke offers the same confused advice that a number of bankers and the IMF have put forward. Raise taxes now, and ruin the improvements in GDP. Raise taxes later to bring deficits later, and face yet another potential downturn.

Failing to address our unsustainable fiscal situation exposes our country to serious economic costs and risks. In the short run, as I have noted, concerns and uncertainty about exploding future deficits could make households, businesses, and investors more cautious about spending, capital investment, and hiring. In the longer term, a rising level of government debt relative to national income is likely to put upward pressure on interest rates and thus inhibit capital formation, productivity, and economic growth

Bernanke comes back to the problems that Congress refuses to discuss because the price at the polls would be too high. That is the trouble with his suggestions about austerity. Like government expense cut policies  introduced in Japan, the UK, and some EU nations, the one risk is that voters will simply throw out the politicians who want to remove entitlements and slash the pay of government workers. The moves have created huge protests throughout Europe.  A similar backlash in the US could simply put candidates who promise a stable financial future without the need for prudent cuts in government expenses out of their jobs. Lawmakers who understand economics and the unstable future of increased national deficits and debt are caught between the Scylla and Charybdis.

It is the march toward old age in the US that is a great deal of the problem. The wave of people born in the 1950s and 1960s have begun to retire, and some of them will live into their 80s and 90s. Their retirement packages have in some cases been ruined by the drop in the stock market in early 2009. They can no  longer count on the equity in their homes. Even their pensions may be underfunded.

Two of the most important driving forces are the aging of the U.S. population, the pace of which will intensify over the next couple of decades as the baby-boom generation retires, and rapidly rising health-care costs

It is clear that Bernanke will never have to run for office and will run the Fed for another six years unless he steps down:

Well-designed fiscal rules cannot substitute for the political will to take difficult decisions, but U.S. and international experience suggests that they can be helpful to legislators in certain circumstances. Indeed, installing a fiscal rule could provide an important signal to the public that the Congress is serious about achieving long-term fiscal sustainability, which itself would be good for confidence

At this stage, no matter what members of Congress say, the budget deficit is not serious enough to be worth addressing. The future is not much of a future if they are put out of Washington and back into real jobs.

Douglas A. McIntyre