Robert J. Samuelson
Photo credit: Mark Wilson, Getty Images
The most interesting part of Fed chairman Ben Bernanke's testimony this morning
before the House Budget Committee was his unambiguous emphasis on the
need to reduce future federal budget deficits. Although there was no
explicit criticism of the Obama Administration in his prepared
testimony, he suggested that deficit reduction needed to go well beyond
announced plans. He repeated the projected deficits for fiscal 2009
($1.8 trillion), 2010 ($1.3 trillion) and 2011 ($900 billion). The
ratio of federal debt to GDP (gross domestic product) would go from
about 40 percent in 2008 to 70 percent in 2011, the "highest level
since the early 1950s." Interestingly, he used the Congressional Budget
Office's projections and not the Administration's slightly more
optimistic estimates. "With the ratio of debt to GDP already elevated,
we will not be able to continue borrowing indefinitely to meet these
demands," he said. The implication was that Congress and the White
House needed to balance the budget and not merely reduce budget
deficits, as the Obama projections indicate. Bernanke has supported
large deficits to combat the recession, but he clearly thinks that
there are limits.
Bernanke also reiterated the Fed's view that the economy will turn up sometime in the last half of the year. But he elaborated by saying that the forecast was premised on a) the belief that "consumer spending and housing demand will stabilize"--steep declines will no longer be a drag on growth; b) "the pace of inventory liquidation will slow" and also will cease being a major drag; and c) there will be a "continuing gradual repair of the financial system and an associated improvement in credit conditions." Despite a bottoming out of the downturn, Bernanke repeated his earlier assessment that unemployment would continue to rise for some time.
