Bernanke Talks Debt before Senate Budget Committee

The Senate Budget Committee heard testimony today from Ben Bernanke, chairman of the Federal Reserve. Opening remarks were made by committee chairman Sen. Kent Conrad (D-ND) – a member of the President’s Fiscal Policy Commission – and new ranking member Sen. Jeff Sessions (R-AL). Senator Sessions echoed Senator Conrad’s points saying that our current fiscal path is “unsustainable.” He said the American people “want us to do something now” to address the deficit problem. And there was agreement among the two that a fiscal plan is needed sooner rather than later. This may signal a new bipartisan pairing to help guide deficit reduction measures through the closely divided Senate.

Chairman Bernanke spoke about the economy, the budget deficit, and the long-term debt problem. He began with cautious optimism, saying, “Overall, the pace of economic recovery seems likely to be moderately stronger in 2011 than it was in 2010.” But, he went on to say, “At this rate of improvement, it could take four to five more years for the job market to normalize fully.” He said the Federal Reserve has the tools it needs to address the issue of economic growth, referring to the second round of quantitative easing it announced in November, as well as the tools for the Fed to unwind its commitments as growth rebounds.

The final portion of Bernanke’s prepared testimony focused on the federal deficit. He warned that:

“an important part of the federal budget deficit appears to be structural rather than cyclical; that is, the deficit is expected to remain unsustainably elevated even after economic conditions have returned to normal.”

This will require a concerted effort in the next few years to begin bringing revenues and outlays in line to stabilize our annual deficits. Under questioning from Senator Conrad, Chairman Bernanke said stabilizing our debt/GDP ratio should be our top priority.

Looking ahead to the overall debt picture, Bernanke called attention to the need for holistic reform. He stated:

“I hope that, in addressing our long-term fiscal challenges, the Congress will seek reforms to the government's tax policies and spending priorities that serve not only to reduce the deficit but also to enhance the long-term growth potential of our economy--for example, by encouraging investment in physical and human capital, by promoting research and development, by providing necessary public infrastructure, and by reducing disincentives to work and to save.”

Senator Ron Wyden (D-OR) devoted much of his question time to the importance of fundamental tax reform in improving our fiscal situation. Bernanke agreed that the December tax cut deal should not be the long-term model for tax policy, and that reform is needed that lowers tax rates and deals with the tax exclusions, credits and breaks known as tax expenditures. Wyden is a sponsor of a major tax reform bill. See CRFB's suggestions for reforming tax expenditures here.

Bernanke also lauded the work of the White House Fiscal Commisison and other groups for highlighting the issue of mounting debt and offering ideas to combat it.

"Plans recently put forward by the President's National Commission on Fiscal Responsibility and Reform and other prominent groups provide useful starting points for a much-needed national conversation about our medium- and long-term fiscal situation. Although these various proposals differ on many details, each gives a sobering perspective on the size of the problem and offers some potential solutions."

See our table comparing the plans here. Senator Mark Warner (D-VA) noted that he is a part of a bipartisan goup of senators that plans to soon offer a debt reduction plan based on the commission report.

In concluding, Bernanke remarked:

“Doing nothing will not be an option indefinitely; the longer we wait to act, the greater the risks and the more wrenching the inevitable changes to the budget will be. By contrast, the prompt adoption of a credible program to reduce future deficits would not only enhance economic growth and stability in the long run, but could also yield substantial near-term benefits in terms of lower long-term interest rates and increased consumer and business confidence.”

Looks like Bernanke just reaffirmed his membership in the Announcement Effect Club. There are a growing number of federal agencies (including the Fed and CBO) and the countless organizations who keep noting that the longer we wait to reform federal spending and taxation, the more we put our economy in jeopardy and the harder it will make fiscal adjustment.

Under questioning over what could cause markets to cease giving the U.S. a pass regarding our mounting debt, Bernanke said that markets are watching for a demonstration of political will on the part of our leaders to tackle the debt. He warned that markets could turn quickly if they didn't see such will.

We commend Chairman Bernanke for using his position to encourage long-term fiscal sustainability, and we applaud senators Conrad and Sessions for hosting the hearing. Strengthening the economy and improving our fiscal outlook are two critical (and intertwined) issues facing Washington, and they both must be addressed.

To get a feel for the tough choices that will be required and to devise a plan of your own, check out our "Stabilize the Debt" simulator.