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.

The benefits and the drawbacks are obvious enough, in the short term. It’s expensive to have fully established bureaucracies chock full of well-compensated officials to deliver police, fire, sanitation, education, and countless other services to only a handful of people. In a state like New Jersey, where a full 566 little towns are squeezed into one of the smallest states in the union (and the property taxes are, as my father routinely gripes, the highest), plenty of people agree that the shift has been a long time coming. Joseph Doria, Jersey's commissioner for community affairs, says the glut of small towns was "created when larger ones broke apart in the late 19th century and early 20th century over family feuds, and over schools and railroads and other reasons." In other words, they changed to adapt to their time, and it's high time that we change to adapt to ours: a new era of bigger, more streamlined models of towns.

Advocates of bigger towns and more efficient services cite a recent Rutgers report that says towns tend to operate along a U-shaped curve of efficiency: tiny towns are the least efficient, small cities between 25,000 and 250,000 are better, and big cities with more than 250,000 people start to drop into inefficiency again. That's not just a Jersey thing; in their literature review, the Rutgers researchers found that the U-shaped curve theory remained relatively consistent across social and cultural divides.

A study of water supply in rural India (World Bank, 2008a) provides more evidence of the U-shape, but in this case, it is applied to households and in a very different context. “The size classes 500 to 1,000 households and 1,000 to 1,500 households have relatively lower cost, compared to smaller or larger piped water supply schemes.” Post-war amalgamation in Japan also showed the U-shaped function, but with somewhat different levels of population, indicating 115,109 persons was the threshold at which efficiency gains would reverse (Mabuchi, 2001).

Case closed? Not quite. Even the authors stress that there was as much inconsistency as commonality in studies on town size. They found "no easy answers, no optimal size, and no ideal government structure" in the literature measuring the correlation between municipal size and cost efficiency; in fact, they said, none of the literature equipped them with much "confidence for further action on a systematic and broad basis."

In the disincorporating towns of the Midwest and the West, it's much harder to see a silver lining in the cost-saving measures. Places on the coast probably have a lot more options than places in Iowa or North Dakota," says Mark Mathers, who researches U.S. population trends at the Population Reference Bureau. "That's one reason why people in the Midwest are leaving in large numbers, because they can’t just move to the next town—there is no next town. In areas out West, you’re relying on the city services for your survival, sometimes in harsh environments, so that will be much more difficult. By taking away these services, the government may save money but inadvertently destroy the glue that holds a community together--Robert Putnam’s social cohesion."

That seems to beg even bigger questions about the geography of future population centers (think Richard Florida). It seems clear that we're ushering in a new era of city planning, and there are plenty of visionaries out there pushing their ideas of how we will all organize ourselves in the future. But while there's tremendous excitement and conversation galore, there's still little consensus on a new, better model for towns. Plus, even if the recession is accelerating certain movements toward consolidation, public opinion hasn't quite followed; as a recent Pew survey showed, despite the influx of young singles into urban centers, more people would still rather live in small towns than in cities or densely populated suburbs. Getting from here to there--whatever "there" is--will be the hard part.

The Toothless Bond Vigilantes: When Treasury yields rose from a low of 2.1 percent to 3.5 percent last month, commentators thought it was a sign that "bond vigilantes" were pushing back against the U.S. government and its endless issuance of new debt. Not so, says Martin Wolf -- the rise in rates is actually a very good thing, and a sign that deflation fears are gone.

A Real Humdinger: As General Motors sheds its crappy assets, first on the chopping block is Hummer, maker of the gas-guzzling, military-caliber vehicle once favored by Paris Hilton and other celebs. Who's buying it? Why, China, of course! The idea of 1.3 billion people with access to an automobile that gets around 10 mpg can't bode well for the environment.

The Incredible Lula: When he was first elected in 2002, "the nation’s currency plummeted 60 percent, and its borrowing costs tripled to 24 percent." Now, despite the recession, his approval rating is 78 percent, higher even than Obama's, and the world's investors will be sad to see him go when his term ends next year. Not to worry -- whoever his successor may be, he's sure to continue Lula's sensible, centrist policies.

Your Taxpayer Dollars at Work: Felix Salmon points us to the new General Motors ad, which looks a lot like the old ones ("We're patriotic!") but with a new script, including lines like, "This is not about going out of business."