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Bernanke Is Blunt About Dangers of the Deficit to the Economy

Credit: CNN
President at the White House speaks to the urgency of the fiscal problem

In testimony before Obama's new bipartisan commission, Ben Bernanke makes clear that the government deficits threatens the American economy.

In testimony today before President Obama's 18-member bipartisan debt commission, which is holding its first of many meetings that will take place over seven months, Fed Chairman, Ben Bernanke, told the members that a credible plan needs to be put in place quickly to control or reduce government spending to get it in line with revenue forecasts. The members heard blunt statements from one of the best connected bureaucrats to the implications of growing Federal budget deficits.

"The path forward contains many difficult tradeoffs and choices, but postponing those choices and failing to put the nation's finances on a sustainable long-run trajectory would ultimately do great damage to our economy," Bernanke said. His frankness was not unexpected as most politicians, Federal, state and local, know that the country, their state and local towns and counties have put themselves in a situation where the deficits have grown to dangerous levels. Americans may be seeing their future in Greece where the Government is near bankrupt and begging for help from the European Union and the International Monetary Fund. The interest cost of their bonds has sky rocketed and there is a reasonable prospect for a default. At the same time, Greek union members and members of the general population have taken to the streets to protest against the Government’s discussions about cuts in pay and benefits as well as other possible solutions to their fiscal crisis.

The situation in the U.S. has not yet reached this level of crisis, but the deficit of the national budget has now grown faster than any other time other than when the country was engaged in world wars. The President speaks about controlling this problem, getting it fixed, but acts otherwise. President Obama echoed this common sentiment in comments made at the White House before the meeting began. The present fiscal situation, he noted, "will require that we put politics aside -- that we think more about the next generation than the next election. There is no other way." However, everywhere one turns finds that there are Administration proposals that will increase the size of government while ignoring the reality of unsustainable entitlement programs that are unfunded. The passage of the new health care bill while correct in its intent to help uninsured people was a prime example of the Government incurring large liabilities without clear and compelling assumptions that it could be paid for. Many of the costly provisions have already been activated while the revenue offset does not begin until future years. One has to ask – is the President speaking out of both sides of his mouth?

Experts calculate that the country’s debt level will rise to 60% of GDP. More ominously is that it will rise to 90% within the next decade. This is a level that has been proven to have severe harmful effects on the economy. The level of Government payments on interest on the debt will squeeze out funds for other programs and restrict the flow of capital to the private markets. The solutions that the Commission may consider fall into 2 primary areas: increase revenue which usually means higher and sometimes new type taxes or eliminate programs or cut back on their costs. The latter will force the members of the Commission to tackle the escalating costs of Medicare, Medicaid and Social Security. This will expose the President’s hand as to whether he is more intent in extending the Government’s role in other parts of the economy or solving the country’s economic problems and rising deficits.

The commission won't have much time. The panel is supposed to produce a report for the president by Dec. 1. What happens between now and then with various administration proposals like cap and trade, financial market regulation and union rule making will set the stage for a larger problem or will represent a commitment to say no to bigger government and larger deficits.

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2 comments on Bernanke Is Blunt About Dangers of the Deficit to the Economy

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By JJFCPA on April 28, 2010 at 07:30 am

I appreciate your always thoughtful and considerate commnets. However, you missed the 2 key points. It does not matter what Obama inherited, it is what he has done and is doing now. First, he is exacerbating the problem, not fixing it. Second, our balance sheet as a country has too much debt on it s books and debt hidden off the books like the unfunded entitlement programs.

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By JJFCPA on April 29, 2010 at 11:21 am

I think that it is a big number - directly (as alot of the revenue offset will not be realized - i.e. tax on cadillac plans in 2014 and cost savings will not occur - i.e. lower insurance premiums; and indireclt via the additional cost to companies as laready being reported by SEC registrants.

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