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Fix the deficit first, Bernanke tells U.S. politicians

U.S. Federal Reserve Chairman Ben Bernanke prodded his country's politicians to get serious about a budget deficit that the central bank chief said is unsustainable.

Over the course of almost four hours of testimony at the House financial committee yesterday, Mr. Bernanke was asked more about the country's record deficit and debt than any other subject, putting him in the middle of a debate that Democratic President Barack Obama and his Republican opponents in Congress appear eager to have but unwilling to resolve.

Mr. Bernanke stepped gingerly around queries that reflected the challenges of a country struggling to escape recession, yet were often political traps rigged to manipulate Mr. Bernanke into embarrassing one side or the other.

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Seeking neutral ground, the Fed chief said it was "very, very important" that the administration and Congress come up with a credible plan to deal with the $1.6-trillion (U.S.) deficit. He stressed that the effort would pay immediate dividends by easing the minds of the investors who finance the government's operations.

"Even a strong effort would be a boost to confidence," Mr. Bernanke said during proceedings that were broadcast on the committee's website.

His appearance was the first stage of Mr. Bernanke's semi-annual report to Congress on monetary policy. He will appear before senators today.

In his prepared remarks yesterday, he reiterated that the "nascent" U.S. recovery will require low interest rates for an "extended period." Stock markets rose after that pledge, as equity investors were reassured the Fed remains far from tightening monetary policy.

The second-most important issue for the committee yesterday was jobs. The Fed predicts the unemployment rate, currently around 10 per cent, will still be at an uncharacteristically high rate of about 7 per cent at the end of 2012. Beyond keeping borrowing costs low, the Fed is working hard to understand what is impeding lending to small businesses, Mr. Bernanke said.

At $1.6-trillion, the U.S. deficit represents about 10 per cent of the world's largest economy. The financial plan Mr. Obama released earlier this month predicts the shortfall will be narrowed to about 4 per cent of GDP by 2014. Congress must pass the budget.

Under tough questioning from California Republican Edward Royce, the Fed Chairman conceded that Mr. Obama's proposal doesn't do enough to contain the growth of the debt - a statement that made for an uncomfortable moment for Mr. Bernanke, who generally seeks to stay out of the political fray.

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Most economists, including Mr. Bernanke, say the debt won't shrink until the deficit is restrained to about 3 per cent of GDP. That's roughly the annual rate of growth the U.S. economy can manage in normal times without stoking inflation. If the deficit grows more quickly than the economy, the government has no ability to begin paring the debt.

Mr. Bernanke said it would be a mistake to try to balance the budget over the next couple of years because the economy is still highly dependent on government spending. He also said the risk of higher interest rates would recede if investors become convinced that the White House and Congress were compromising on the issue.

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Unsustainable

The Fed predicts the unemploy-ment rate will be at 8.2 per cent in 2012, well above its long-run sustainable rate at the end of that year.

Long-run sustainable rate: 5%

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THE GLOBE AND MAIL / SOURCES: U.S. LABOR DEPARTMENT; COUNCIL OF ECONOMIC ADVISERS

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About the Author
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More

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