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Bernanke: What Future Standards Of Living Will Be Like If Deficit Is Not Brought Under Control

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Feb 09, 2011

Federal Reserve chairman Ben Bernanke, who today made one of his regular appearances testifying before Congress, continues to argue that the country has to do something to get its budget under control. Speaking of budgets, President Obama is expected to submit his to Congress on Monday, and there’s already debate over one major initiative: a plan designed to help financially-strapped state governments, which is getting early pushback from GOP lawmakers.


The Word from the Fed

Bernanke’s Capitol Hill presentations are always a big deal, but this one is getting particular attention – with The Wall Street Journal live-blogging the testimony – because this is the first time the Fed chairman has testified before the new House Republican majority. You can see his written testimony here and here are a couple of the key paragraphs about the budget:

“If government debt and deficits were actually to grow at the pace envisioned, the economic and financial effects would be severe. Sustained high rates of government borrowing would both drain funds away from private investment and increase our debt to foreigners, with adverse long-run effects on U.S. output, incomes, and standards of living. Moreover, diminishing investor confidence that deficits will be brought under control would ultimately lead to sharply rising interest rates on government debt and, potentially, to broader financial turmoil. In a vicious circle, high and rising interest rates would cause debt-service payments on the federal debt to grow even faster, resulting in further increases in the debt-to-GDP ratio and making fiscal adjustment all the more difficult…”

By definition, the unsustainable trajectories of deficits and debt that the [Congressional Budget Office] outlines cannot actually happen, because creditors would never be willing to lend to a government with debt, relative to national income, that is rising without limit. One way or the other, fiscal adjustments sufficient to stabilize the federal budget must occur at some point. The question is whether these adjustments will take place through a careful and deliberative process that weighs priorities and gives people adequate time to adjust to changes in government programs or tax policies, or whether the needed fiscal adjustments will come as a rapid and painful response to a looming or actual fiscal crisis. Acting now to develop a credible program to reduce future deficits would not only enhance economic growth and stability in the long run, but could also yield substantial near-term benefits in terms of lower long-term interest rates and increased consumer and business confidence.”

Budget Ideas: Helping Out the States, and “Success Bonds”

President Obama’s budget request will include a proposal to give states more time to pay back federal money they borrowed to pay unemployment benefits. Because of the scope of the Great Recession, states burned through their unemployment funds fast, and 30 states borrowed some $42 billion to keep paying benefits. Now those states need to start paying the federal government back and face automatic increases in their unemployment taxes, even as states confront severe fiscal problems of their own:

“In his budget, officials said, Mr. Obama will call for deferring interest payments on the debt and postponing the automatic tax increases. Then, in 2014, to bring that money back into federal coffers, the administration proposes to raise the minimum level on which employers pay taxes.”

David Leonhardt at The New York Times looks at another idea President Obama may endorse: “pay for success bonds,” a different way of funding programs, which is now getting a tryout in Britain:

“The idea goes by one of two names: pay for success bonds or social impact bonds. Either way, nonprofit groups like foundations pay the initial money for a new program and also oversee it, with government approval. The government will reimburse them several years later, possibly with a bonus — but only if agreed-upon benchmarks show that the program is working.

If it falls short, taxpayers owe nothing.”


Chart of the Day

Here’s what Bernanke is talking about: public debt which is projected to increase at such a fast growth rate that eventually investors would start to balk at lending us money:

Click here to see a larger version of this chart.


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Fiscal Future Daily is produced by Public Agenda for Choosing Our Fiscal Future, in partnership with the National Academy of Public Administration and with support by the John D. and Catherine T. MacArthur Foundation. The editor in chief is Scott Bittle, with contributors Francie Grace, David White, Jen Vento, Hart Hooton and Tom Watson.

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