Chairman Bernanke Testifies Before the Joint Economic Committee
This morning, Federal Reserve Chairman Ben Bernanke testified before the Joint Economic Committee regarding the current economic climate. He noted that the economy has begun to show signs of life, attributing the accelerating pace of GDP growth to gradual improvements in credit conditions and the housing market. He also argued that the Fed should continue its quantitative easing at its current pace until the labor market improves sufficiently.
At the same time, Chairman Bernanke warned of more bumps on the road to recovery, particularly short-term fiscal consolidation, mainly from the sequester. He cautioned against using the short-term improvement in CBO’s latest fiscal projections as evidence that we are out of the woods in terms of our debt problems and argued that the best way for policymakers to sustain economic growth over the long term is to enact comprehensive deficit reduction legislation. In short, he concluded that under sequestration, lawmakers are doing perhaps too much in the short term while leaving the long-term deficit issue inadequately addressed.
Although near-term fiscal restraint has increased, much less has been done to address the federal government's longer-term fiscal imbalances. Indeed, the CBO projects that, under current policies, the federal deficit and debt as a percentage of GDP will begin rising again in the latter part of this decade and move sharply upward thereafter, in large part reflecting the aging of our society and projected increases in health-care costs, along with mounting debt service payments.
To promote economic growth and stability in the longer term, it will be essential for fiscal policymakers to put the federal budget on a sustainable long-run path. Importantly, the objectives of effectively addressing longer-term fiscal imbalances and of minimizing the near-term fiscal headwinds facing the economic recovery are not incompatible. To achieve both goals simultaneously, the Congress and the Administration could consider replacing some of the near-term fiscal restraint now in law with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run.
Congress should heed Chairman Bernanke’s advice and pass comprehensive legislation to put the debt on a sustained downward path that will foster future economic growth. Importantly, enacting a deficit reduction plan today is not the same thing as implementing deficit reduction today. As Chairman Bernanke recommends and we have noted before, deficit reduction can and should be phased in gradually to protect the fragile economic recovery. But that is no excuse for Congress to ignore the budget indefinitely.