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Brooks Wilson's Economics Blog: Bernanke As A Deficit Hawk

Thursday, June 4, 2009

Bernanke As A Deficit Hawk

Craig Torres and Brian Faler writing in "Bernanke Warns Deficits Threaten Financial Stability (Update4)," for Bloomberg on June 3 describe Federal Reserve Chairman Bernanke's most recent comments before the House Budget Committee.  I have bolded several phrases to highlight the Chairman's concern is long term, that deficits, if not dramatically reduced, will affect long term financial stability and economic growth.  Deficit reduction must come from increasing taxes or reducing spending.
Federal Reserve Chairman Ben S. Bernanke said large U.S. budget deficits threaten financial stability and the government can’t continue indefinitely to borrow at the current rate to finance the shortfall.

“Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” Bernanke said in testimony to lawmakers today. “Maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance.”...

...He said the Fed won’t finance government spending over the long term, while warning that the financial industry remains under stress and the credit crunch continues to limit spending...

The budget deficit this year is projected to reach $1.85 trillion, equivalent to 13 percent of the nation’s economy, according to the nonpartisan Congressional Budget Office.

Either cuts in spending or increases in taxes will be necessary to stabilize the fiscal situation,” Bernanke said in response to a question. “The Federal Reserve will not monetize the debt.”...

Rising government spending, forecasts for a record fiscal deficit and an unprecedented expansion of central bank credit have also fueled investor concerns that inflation will rise. Bernanke said inflation “will remain low” as the economy operates with slack resource use.
I have a modest suggestion for cutting spending now.  Recent improvement in economic conditions is not a result of February's emergency $787 billion stimulus package.  As Russ Robert reports at Cafe Hayek, only $36.7 billion of the stimulus has been spent.  Take President Clinton's budget director Alice Rivlin's advice and divide the stimulus into immediate stimulus measures and long term transformative spending.  Take more time examining the transformative spending.  Most if it can be cut.  Rivlin's advice is not draconian as it would preserve much of the stimulus, but acknowledges weaknesses of fiscal policy: it crowds out private investment lowering long term economic growth, is slow to evolve, and almost always results in wasteful spending.  

1 comment:

  1. I agree that cutting spending and increasing taxes are both necessary to balance the budget and begin eliminating our deficit. Primarily, I believe spending could be cut by reducing the size of the federal government.

    I would like to equate the spending practice of the government to an individual using a credit card with no credit limit. The governemnt keeps on adding more and more charges and never paying them off. If that isn't bad enough, there is always the interest to contend with. The money should be paid back sooner than later and will have to come out of American citizens' pockets.

    Student - Candis Massingill