Highlights from Chairman Bernanke's Speech

Jun 15, 2011

We were lucky enough to have Federal Reserve Chairman Ben Bernanke open our annual conference this week. His remarks were an important statement on the need for action and also offered some helpful guidance on how to move forward. Full text of his remarks is here and video of the event can be viewed here.

Bernanke on our current situation:

Perhaps the most important thing for people to understand about the federal budget is that maintaining the status quo is not an option. Creditors will not lend to a government whose debt, relative to national income, is rising without limit; so, one way or the other, fiscal adjustments sufficient to stabilize the federal budget must occur at some point. These adjustments could take place through a careful and deliberative process that weighs priorities and gives individuals and firms adequate time to adjust to changes in government programs and tax policies. Or the needed fiscal adjustments could come as a rapid and much more painful response to a looming or actual fiscal crisis in an environment of rising interest rates, collapsing confidence and asset values, and a slowing economy.

The Peterson-Pew Commission on Budget Reform, a CRFB project, made this point in 2009 in the report, Red Ink Rising.

Bernanke on what we can do to fix it and the timing:

Achieving fiscal sustainability, therefore, requires a long-run plan, one that reduces deficits over an extended period and that, to the fullest extent possible, is credible, practical, and enforceable. In current circumstances, an advantage of taking a longer-term perspective in forming concrete plans for fiscal consolidation is that policymakers can avoid a sudden fiscal contraction that might put the still-fragile recovery at risk. At the same time, acting now to put in place a credible plan for reducing future deficits would not only enhance economic performance in the long run, but could also yield near-term benefits by leading to lower long-term interest rates and increased consumer and business confidence.

Chairman Bernanke is a charter member of CRFB's Announcement Effect Club, which promotes the idea that devising a credible fiscal plan now that would be phased in over time would aid the economy in the shorter term. You can compare the various fiscal plans here.

Bernanke on what a fiscal plan would look like:

Clear metrics are important, together with triggers or other mechanisms to establish the credibility of the plan. For example, policymakers could commit to enacting in the near term a clear and specific plan for stabilizing the ratio of debt to GDP within the next few years and then subsequently setting that ratio on a downward path. Indeed, such a trajectory for the ratio of debt to GDP is comparable to the one proposed by the National Commission on Fiscal Responsibility and Reform. To make the framework more explicit, the President and congressional leadership could agree on a definite timetable for reaching decisions about both shorter-term budget adjustments and longer-term changes. Fiscal policymakers could look now to find substantial savings in the 10-year budget window, enforced by well-designed budget rules, while simultaneously undertaking additional reforms to address the long-term sustainability of entitlement programs.

The Peterson-Pew Commission recommended a medium-term goal of stabilizing the debt at 60 percent of GDP and lowering it further in the longer-term. You can try reaching the goal yourself using CRFB's Stabilize the Debt budget simulator. The Commission also laid out budget process reforms to help enforce debt reduction goals in Getting Back in the Black; recommendations included debt targets and triggers. The Commission recently offered ideas for making President Obama's proposed "debt failsafe" trigger work and also created a Fiscal Toolbox summarizing and comparing triggers and other budget mechanisms. And CRFB has offered ideas for reforming Social Security and health care programs to strengthen their long-term sustainability.

Some great quotes by Chairman Bernanke! We were lucky and grateful to have him keynote our conference. We hope policymakers will listen closely.