Federal Reserve Chairman Ben Bernanke said Wednesday that huge U.S. budget deficits threaten the nation’s long-term economic health and should be addressed soon.
Obama administration officials have argued that the economy, while improving, is still too weak to bear all the new taxes and spending cuts that would come with an aggressive deficit-reduction campaign. In remarks to the Dallas Chamber of Commerce Wednesday, Mr. Bernanke agreed, but said merely articulating a plan for reducing the deficit in the long run would help the economy now.
“The economist John Maynard Keynes said that in the long run, we are all dead. If he were around today he might say that, in the long run, we are all on Social Security and Medicare,” Mr. Bernanke said.
Cutting the deficit ultimately will mean choosing between cutting those entitlements, which will soar as baby boomers retire, raising taxes, or other spending cuts.
Yields on 10-year Treasury notes have risen from around 3.25% in late November to just under 3.9% today, in part because of concerns in credit markets about the mountains of government debt investors are being asked to buy to fund U.S deficits.
Those higher rates push up borrowing costs for many businesses and consumers, too, because many private interest rates are tied to yields on government debt.
“Nothing prevents us from beginning now to develop a credible plan for meeting our long-run fiscal challenges,” Mr. Bernanke said. “Indeed, a credible plan that demonstrated a commitment to achieving long-run fiscal sustainability could lead to lower interest rates and more rapid growth in the near term.”
Conversely, he warned, if Congress and the Obama administration don’t tackle the problem, rates could rise and derail the economic recovery.
Peter Orszag, director of the White House Office of Management and Budget, said the administration has taken steps toward deficit reduction by signing a health-care overhaul bill with a commission meant to rein in Medicare costs, and by creating a separate commission that will make recommendations for deficit cuts. Those steps, he said, were “necessary, but not sufficient.”
Mr. Bernanke has kept a relatively low profile over the past few months as he waited for the Senate to confirm him for a second four-year term at the helm of the Fed. He had also been busy working the halls of Congress to convince lawmakers not to strip the Fed of its powers as a bank regulator in a financial-overhaul bill.
