"What’s Bernanke Getting At?
- Posted by ryan on June 3rd, 2009 filed in Economics
As you know, I’ve been following the ongoing debate over the extent to which markets are nervous about American government debt levels, which may or may not betoken inflation to come and/or a crowding out of private investment and/or a dollar run. Martin Wolf has a relatively new column up which, in my view, levels the arguments of those like Niall Ferguson and John Taylor, who see disaster at the doorstep. As Wolf says, there is very little in interest rates to indicate a fear of runaway inflation or a crowding out of private investment.
Ben Bernanke presented testimony this morning in which he seconded some of Wolf’s points — most notably, he suggested that slack in the system would persist for some time, making near-term inflation extremely unlikely. But he also attributed the recent rise in long-term Treasury to concern over deficits, at least in part. And, he had this to say:
Certainly, our economy and financial markets face extraordinary near-term challenges, and strong and timely actions to respond to those challenges are necessary and appropriate. Nevertheless, even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance. Prompt attention to questions of fiscal sustainability is particularly critical because of the coming budgetary and economic challenges associated with the retirement of the baby-boom generation and continued increases in medical costs. The recent projections from the Social Security and Medicare trustees show that, in the absence of programmatic changes, Social Security and Medicare outlays will together increase from about 8-1/2 percent of GDP today to 10 percent by 2020 and 12-1/2 percent by 2030. With the ratio of debt to GDP already elevated, we will not be able to continue borrowing indefinitely to meet these demands.
Addressing the country’s fiscal problems will require a willingness to make difficult choices. In the end, the fundamental decision that the Congress, the Administration, and the American people must confront is how large a share of the nation’s economic resources to devote to federal government programs, including entitlement programs. Crucially, whatever size of government is chosen, tax rates must ultimately be set at a level sufficient to achieve an appropriate balance of spending and revenues in the long run. In particular, over the longer term, achieving fiscal sustainability–defined, for example, as a situation in which the ratios of government debt and interest payments to GDP are stable or declining, and tax rates are not so high as to impede economic growth–requires that spending and budget deficits be well controlled.
I’m not quite sure how to interpret this. On the one hand, it seems clear that reduced debt levels would make his life easier, and politically speaking, it will be difficult (in my view) to pass additional deficit-funded measures in the short-term without identifying some clear new revenue stream to be tapped to eventually pay for the program. On the other hand, Bernanke sure does seem to be making his policy preferences known in ways I don’t much like. This testimony will be ammunition for the Fergusons out there, who have failed to find much support in bond markets. If it seems clear that current deficits aren’t excessively inflationary and aren’t crowding out private investment, and new stimulus — in the form of unemployment benefit extensions, say — is deemed necessary to prevent the economy from tipping once more into a rapid rate of decline, then I’d like the government to have a free hand to do what needs to be done. Instead, we’ll have a bunch of blue dogs out there waving the text above.
The bottom line is this — the issue of long-run budget sustainability is actually of crucial importance. It should be part of the ongoing policy conversation. It should not be the beginning and end of the conversation, given the broader problem of economic weakness. But that’s increasingly the way these discussions are playing out. Bernanke must have known that his take on deficits would be splashed across news sites everywhere, reinforcing a meme that’s been pushed by conservatives in recent weeks. He must have known that his advisement that debt levels could be a major problem in the future would be interpreted by the press as a belief that debt levels are a major problem right now.
For someone with his background, and his awareness of the history of the Great Depression, I find this to be a very confusing and unfortunate move."