Fed chairman warns of potential fiscal disaster for United States - Senate is told deficits are looming threat
Fed chairman warns of potential fiscal disaster for United States - Senate is told deficits are looming threat
By Steven R. Weisman
Copyright by The International Herald Tribune
Published: January 18, 2007
WASHINGTON: Warning against complacency over the U.S. federal deficit, Ben Bernanke, the Federal Reserve chairman, said Thursday that recent positive trends on the budget were a "calm before the storm" masking a long- term economic threat posed by looming deficits in Social Security and Medicare.
"The longer we wait, the more severe, the more draconian, the more difficult the adjustment is going to be," Bernanke said in response to a question at a Senate hearing about when lawmakers should tackle the growth of spending in the twin retirement systems. "I think the right time to start is about 10 years ago."
In substance, Bernanke's comments were consistent with his past warnings, and those of his predecessor, Alan Greenspan, about the cost of the baby boom generation retiring. But his tone appeared to be more urgent, and the timing seemed aimed at the arrival of a new Democratic-led Congress that is just now setting its priorities.
His comments also agreed with statements since last summer by the Treasury secretary, Henry Paulson Jr., in which Paulson said he favored dealing with the cost of entitlements now rather than later. That stance rejected the advice of some Republican lawmakers that the issues were too divisive for the new Congress to deal with less than two years before a presidential election.
Paulson has begun discussions with leading Democrats in Congress on Social Security, but the administration has not shown its hand in terms of specific proposals. President George W. Bush's earlier proposal to convert Social Security benefits for some future retirees into individual investment accounts was rejected by Congress.
The new tone of the Congress was established by Senator Kent Conrad, a North Dakota Democrat who has long criticized the Bush administration's tax cuts and warned of long-term federal deficits. Only now, Conrad was chairman at the hearing and was eager to hear Bernanke endorse his view that the deficits were a dangerous problem.
But Bernanke was also careful not to make any judgments about how Congress should deal with the problem, despite efforts by Conrad and other Democrats to oppose extending the Bush administration's tax cuts, which expire at the end of the decade.
Neither did Republican senators succeed in getting him to criticize tax increases and suggest that it would be better to cut spending, as they used to be able to do with Greenspan, much to the dismay of Democrats.
Instead, he said Congress should decide what levels of spending on social programs were appropriate, and then set taxes at a level necessary to pay for them. He added that tax cuts may be beneficial to the economy but that they usually did not pay for themselves by generating more tax revenue than they drained from the Treasury.
"I'm going to try to avoid making specific recommendations on tax policy," Bernanke said in response to a question from Senator Judd Gregg of New Hampshire, the ranking Republican on the Senate Budget Committee. "I don't think there's a magic number. I only say that there is a difficult balance there."
The Federal Reserve chairman came to a hearing of the Senate Budget Committee citing recent long-term projections by the Congressional Budget Office that Social Security and Medicare outlays will rise from 8.5 percent of the economy now to 10.5 percent in 2015 and 15 percent in 2030.
These costs would force the United States to keep borrowing if they are not controlled, pushing the ratio of publicly held federal debt from its current level of 37 percent of the economy to roughly 100 percent in 2030, a level reached previously only during World War II.
"If government debt and deficits were actually to grow at the pace envisioned by the CBO's scenario, the effects on the U.S. economy would be severe," Bernanke told the senators. He said the trends would slow economic growth, drain funds for private investment and sap the confidence of consumers, businesses and investors.
Paulson's negotiations with Congress have been very preliminary, his aides say. The talks will probably not begin in earnest until Bush gives his State of the Union speech Tuesday, when he is expected to outline his views not only on entitlements but on the overall budget.
Bush has said, however, that the tax cuts are all but sacrosanct in his view, and Democratic leaders say they do not expect to try to rescind them this year.
But they also say that it will be impossible to deal with entitlements without looking at the tax side of the ledger, and if Bush lays out a proposal that relies solely on personal investment accounts, they will block it.
Administration officials say they are waiting for the Democrats to indicate to them what their own approach will be.
By Steven R. Weisman
Copyright by The International Herald Tribune
Published: January 18, 2007
WASHINGTON: Warning against complacency over the U.S. federal deficit, Ben Bernanke, the Federal Reserve chairman, said Thursday that recent positive trends on the budget were a "calm before the storm" masking a long- term economic threat posed by looming deficits in Social Security and Medicare.
"The longer we wait, the more severe, the more draconian, the more difficult the adjustment is going to be," Bernanke said in response to a question at a Senate hearing about when lawmakers should tackle the growth of spending in the twin retirement systems. "I think the right time to start is about 10 years ago."
In substance, Bernanke's comments were consistent with his past warnings, and those of his predecessor, Alan Greenspan, about the cost of the baby boom generation retiring. But his tone appeared to be more urgent, and the timing seemed aimed at the arrival of a new Democratic-led Congress that is just now setting its priorities.
His comments also agreed with statements since last summer by the Treasury secretary, Henry Paulson Jr., in which Paulson said he favored dealing with the cost of entitlements now rather than later. That stance rejected the advice of some Republican lawmakers that the issues were too divisive for the new Congress to deal with less than two years before a presidential election.
Paulson has begun discussions with leading Democrats in Congress on Social Security, but the administration has not shown its hand in terms of specific proposals. President George W. Bush's earlier proposal to convert Social Security benefits for some future retirees into individual investment accounts was rejected by Congress.
The new tone of the Congress was established by Senator Kent Conrad, a North Dakota Democrat who has long criticized the Bush administration's tax cuts and warned of long-term federal deficits. Only now, Conrad was chairman at the hearing and was eager to hear Bernanke endorse his view that the deficits were a dangerous problem.
But Bernanke was also careful not to make any judgments about how Congress should deal with the problem, despite efforts by Conrad and other Democrats to oppose extending the Bush administration's tax cuts, which expire at the end of the decade.
Neither did Republican senators succeed in getting him to criticize tax increases and suggest that it would be better to cut spending, as they used to be able to do with Greenspan, much to the dismay of Democrats.
Instead, he said Congress should decide what levels of spending on social programs were appropriate, and then set taxes at a level necessary to pay for them. He added that tax cuts may be beneficial to the economy but that they usually did not pay for themselves by generating more tax revenue than they drained from the Treasury.
"I'm going to try to avoid making specific recommendations on tax policy," Bernanke said in response to a question from Senator Judd Gregg of New Hampshire, the ranking Republican on the Senate Budget Committee. "I don't think there's a magic number. I only say that there is a difficult balance there."
The Federal Reserve chairman came to a hearing of the Senate Budget Committee citing recent long-term projections by the Congressional Budget Office that Social Security and Medicare outlays will rise from 8.5 percent of the economy now to 10.5 percent in 2015 and 15 percent in 2030.
These costs would force the United States to keep borrowing if they are not controlled, pushing the ratio of publicly held federal debt from its current level of 37 percent of the economy to roughly 100 percent in 2030, a level reached previously only during World War II.
"If government debt and deficits were actually to grow at the pace envisioned by the CBO's scenario, the effects on the U.S. economy would be severe," Bernanke told the senators. He said the trends would slow economic growth, drain funds for private investment and sap the confidence of consumers, businesses and investors.
Paulson's negotiations with Congress have been very preliminary, his aides say. The talks will probably not begin in earnest until Bush gives his State of the Union speech Tuesday, when he is expected to outline his views not only on entitlements but on the overall budget.
Bush has said, however, that the tax cuts are all but sacrosanct in his view, and Democratic leaders say they do not expect to try to rescind them this year.
But they also say that it will be impossible to deal with entitlements without looking at the tax side of the ledger, and if Bush lays out a proposal that relies solely on personal investment accounts, they will block it.
Administration officials say they are waiting for the Democrats to indicate to them what their own approach will be.
posted by Carlos T Mock at 7:02 AM
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