Earlier today, the chairmen of the Federal Reserve, Ben Bernanke gave a speech at Jackson Hole, Wyoming where he commented on the current state of our economy and commented on our fiscal situation, including our budget process. Dr. Bernanke noted that the economic recovery has slowed (with factors affecting it such as the global economic situation and the housing slump), although our economy's foundations are still quite strong which will likely prevent the United States from becoming too stagnant or into a prolonged recession.

When talking about fiscal policy, Dr. Bernanke noted, as he has in the past, that our fiscal policy is headed in the wrong direction and if not corrected, might risk "severe economic and financial damage". He also noted that the current high level of unemployment is a burden on our fiscal situation and that increased employment can help our fiscal situation, but that we cannot grow our way out of our fiscal mess.

Of particular note, Dr. Bernanke said, with regard to budget process reform:

Finally, and perhaps most challenging, the country would be well served by a better process for making fiscal decisions. The negotiations that took place over the summer disrupted financial markets and probably the economy as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses. Although details would have to be negotiated, fiscal policymakers could consider developing a more effective process that sets clear and transparent budget goals, together with budget mechanisms to establish the credibility of those goals. Of course, formal budget goals and mechanisms do not replace the need for fiscal policymakers to make the difficult choices that are needed to put the country's fiscal house in order, which means that public understanding of and support for the goals of fiscal policy are crucial.

As the Peterson-Pew Commission on Budget Reform has recommended (see their December 2010 report, "Getting in the Black"), enacting a credible goal for fiscal policy – such as stabilizing the debt at a specified level within the decade and lowering it to a safer level thereafter – would provide a clear standard for leaders and the public to judge the results of budget decisions and a basis for enforcing greater discipline. While setting clear, enforceable goals is only part of building a smarter budget process, doing so would help keep pressure on leaders to make hard choices going forward.

For the full text of Dr. Bernanke's speech, click here.