Bernanke warns of high budget deficits

Fed Chairman Ben S. Bernanke waded further into an area of economic policy over which he has no official responsibility.
Fed Chairman Ben S. Bernanke waded further into an area of economic policy over which he has no official responsibility. (Stephan Savoia)
By Neil Irwin
Washington Post Staff Writer
Tuesday, October 5, 2010

The nation's economic future would be endangered if the government does not rein in budget deficits in the years ahead, Federal Reserve Chairman Ben S. Bernanke said Monday, and Congress should consider new budgeting rules to try to make that happen.

"One way or the other, fiscal adjustments sufficient to stabilize the federal budget will certainly occur at some point," Bernanke told an audience in Providence, R.I. "The only real question is whether these adjustments will take place through a careful and deliberative process . . . or whether the needed fiscal adjustments will be a rapid and painful response to a looming or actual fiscal crisis."

With his comments, Bernanke again waded into an area of economic policy over which he has no official responsibility but has become more vocal this year. He avoided endorsing specific tax or spending policies, and his speech did not explicitly address the major fiscal policy debate of the moment: whether to extend all or part of George W. Bush's tax cuts, scheduled to expire at the end of the year.

He did, however, say that "economic conditions provide little scope for reducing deficits significantly further over the next year or two" and that "premature fiscal tightening could put the recovery at risk" which implies that the tax cuts should not be allowed to expire in 2010.

Bernanke has aimed to use the weight of his words to try to give more momentum to efforts to reduce the budget deficit in the medium to long term, and said it is "crucially important" that fiscal policy be put on a more sustainable path.

"An improving economy should reduce near-term deficits, but our public finances are nevertheless on an unsustainable path in the longer term," Bernanke told the Rhode Island Public Expenditure Council in a speech. "We should not underestimate these fiscal challenges; failing to respond to them would endanger our economic future."

And indeed, taking action now to reduce deficits a few years down the road could help the economy now, he argued, by increasing public confidence and helping keep interest rates low.

Bernanke said Congress should seriously consider "fiscal rules" that could make it easier to rein in the deficit over time, such as a stronger version of "paygo" pay-as-you-go rules now in place. He noted that nations ranging from Sweden to Canada to Chile have had success reining in deficits through rules that aim to limit the options of future budget-writers.

"Although not all countries with fiscal rules have achieved lower deficits and debt, the weight of the evidence suggests that well-designed rules can help promote improved fiscal performance," he said.

Earlier Monday, Bernanke told a group of college students in a town hall meeting that additional purchases of bonds by the Fed, an action the central bank will consider at its next policy meeting, could benefit the economy.

"I do think that additional purchases - although we don't have precise numbers for how big the effects are - I think they have the ability to ease financial conditions," Bernanke said at the event. Several of Bernanke's Fed colleagues have shown an inclination toward such steps in recent days.

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