Bernanke Warns of ‘Unsustainable’ Debt

Bernanke Warns of ‘Unsustainable’ Debt



Mark Wilson/Getty Images
Federal Reserve Board Chairman Ben S. Bernanke during a House Budget Committee hearing on


Wednesday in Washington.
By SEWELL CHAN
Published: June 9, 2010

WASHINGTON — The chairman of the Federal Reserve, Ben S. Bernanke, warned on Wednesday that “the federal budget appears to be on an unsustainable path,” but also recognized that the “exceptional increase” in the deficit had been necessary to ease therecession.

Mr. Bernanke’s comments, at a hearing of the House Budget Committee, reiterated his view that the economic recovery would most likely be slow and painful for many Americans. The Fed projects gross domestic product, the broadest measure of economic activity, to rise about 3.5 percent this year — a pace barely above that needed to keep pace with the growth in the labor force.

Mr. Bernanke noted some improvements in consumer spending, particularly on durable goods, and in business investments in software and equipment, but also cautioned that “underlying housing activity appears to have firmed only a little since mid-2009, with activity being weighed down, in part, by a large inventory of distressed or vacant existing houses and by the difficulties of many builders in obtaining credit.”

The chairman offered a somewhat positive assessment of the debt crisis in Europe.

“If markets continue to stabilize, then the effects of the crisis on economic growth in the United States seem likely to be modest,” he said. “Although the recent fall in equity prices and weaker economic prospects in Europe will leave some imprint on the U.S. economy, offsetting factors include declines in interest rates on Treasury bonds and home mortgages as well as lower prices for oil and some other globally traded commodities.”

In response to a question, Mr. Bernanke said that he expected to the economy to grow at a “modest pace” this year .

But what is likely to be the most closely watched part of Mr. Bernanke’s testimony, on fiscal policy and his comments about the budget, will offer little comfort to either Democrats or Republicans.

“A variety of projections that extrapolate current policies and make plausible assumptions about the future evolution of the economy,” Mr. Bernanke said, “show a structural budget gap that is both large relative to the size of the economy and increasing over time.”

During nearly two hours of questioning, Mr. Bernanke parried efforts by members of both parties to score political points, seeming to disappoint both sides. After saying “the budget deficit should narrow over the next few years,” he refused to make policy recommendations on how to do so, though he did caution against reacting hastily.

“This very moment is not the time to radically reduce our spending or raise our taxes, because the economy is still in a recovery mode and needs that support,” Mr. Bernanke told Representative Bob Etheridge, Democrat of North Carolina.

To Representative Jim Jordan of Ohio, one of several Republicans who accused the Obama administration of being profligate, Mr. Bernanke said that “increased taxes, cuts in spending that are too large would be a negative, would be a drag on recovery.”

To Representative Gerald E. Connolly, a Virginia Democrat who tried to get Mr. Bernanke to criticize the huge 2001 tax cuts signed into law by President George W. Bush, Mr. Bernanke said, “It probably did strengthen the economy, but it also raised the deficit.”

While defending the extraordinary responses to the recession as necessary, Mr. Bernanke has also emphasized the risks associated with the aging of the population. This year, he said, there are about five Americans between the ages of 20 and 64 for each person aged 65 or older. By the time most of the baby boomers have retired in 2030, he warned, there will be only three.

“In addition, government expenditures on health care for both retirees and nonretirees have continued to rise rapidly as increases in the costs of care have exceeded increases in incomes,” Mr. Bernanke said. “To avoid sharp, disruptive shifts in spending programs and tax policies in the future, and to retain the confidence of the public and the markets, we should be planning now how we will meet these looming budgetary challenges.”

Mr. Bernanke did not disclose his views on either the timing or the composition of the steps to meet those challenges — in a question-and-answer session with the broadcast journalist, Sam Donaldson, on Monday night, Mr. Bernanke said he, like Congress, was awaiting the conclusions of a bipartisan fiscal commission appointed by President Obama.

http://www.nytimes.com/2010/06/10/business/economy/10fed.html?src=me&ref=business