Our guest blogger is Michael Linden, the Associate Director for Tax and Budget Policy at the Center for American Progress Action Fund.
Federal Reserve Chairman Ben Bernanke is causing a bit of a media tizzy today with his latest speech, in which he warns that, “unless we as a nation demonstrate a strong commitment to fiscal responsibility, in the longer run we will have neither financial stability nor healthy economic growth.”
The Chairman is not wrong. Consistently running huge budget deficits with no prospect of ever closing the gap between spending and revenue can have enormous economic consequences. Interest rates would eventually rise, painful inflation would eventually take hold, and an ever larger share of the federal budget would be spent just in the service of paying interest on a bulging debt. This is definitely a situation that we want to avoid.
But don’t confuse a warning about potential future problems with an alarm bell signaling imminent danger. The Chairman is correct when he says that we need to solve our long-term deficit problem, be he made a bunch of other points that are much more relevant right now, and also happen to be right on the money:
1. “[A] sharp near-term reduction in our fiscal deficit is probably neither practical nor advisable.”
Right on, Mr. Chairman. Don’t let anyone tell you that this year’s deficit is an economic problem. It isn’t. In fact, this year’s deficit, and last year’s, is a big reason why the economy is now slowly recovering.
2. “[F]or the near term, inflation appears to be well controlled [and]… [i]nflation expectations, as measured in the financial markets or in surveys, appear stable.”
Correct. Inflation scare-mongers want us to believe that we are on the verge of becoming Zimbabwe, but the reality belies their dire predictions.
3. “To avoid large and unsustainable budget deficits, the nation will ultimately have to choose among higher taxes, modifications to entitlement programs such as Social Security and Medicare, less spending on everything else from education to defense, or some combination of the above.”
Bull’s-eye. Our long term deficit is the product of an aging population, rising health care costs and a persistent, pernicious campaign to cut taxes (especially for the wealthy) without paying for it. Getting the budget back into balance is going to mean reducing some spending, but it’s also going to mean higher revenues. Anyone who says we can balance the budget entirely by cutting spending isn’t actually interested in solving the problem. They’re just trying to score political points.
Finally…
4. “History has demonstrated time and again the inherent resilience and recuperative powers of the American economy. Our country…has surmounted difficult challenges in the past. I do not doubt that we can do so once again.”
Amen. The challenge of bringing our budget back onto a sustainable path is not insurmountable, even after eight years of remarkable fiscal mismanagement. And Bernanke is also right that meeting this challenge is going to mean making some “difficult choices.” But making difficult choices doesn’t mean economic ruin. The federal government could certainly stand to cut some fat, just as the very richest Americans could certainly stand to pay a little more in taxes.