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Bernanke to Senate: If you want to fix job deficit, don't forget budget deficit

Federal Reserve Chairman Bernanke suggests that the Senate to link a jobs bill with a credible plan to cut the budget deficit.

By Staff writer / February 25, 2010

Federal Reserve Board Chairman Ben Bernanke testified before a Senate Banking, Housing and Urban Affairs Committee hearing Feb 25. He told senators that they should link a jobs bill with a credible plan to cut US deficits.

Kevin Lamarque/Reuters

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Federal Reserve Chairman Ben Bernanke offered some cautionary advice for Congress Thursday: New stimulus spending will do better at creating jobs if lawmakers can also chart a course toward lower federal budget deficits.

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His comment touched on two issues that have emerged as top concerns for American voters – the dearth of jobs and untamed government deficits.

Virtually everyone agrees these are both serious problems for the nation. What's controversial is the question of whether the two problems are linked. Mr. Bernanke said, in effect, that they are.

Questions about jobs came up repeatedly during two days of the Fed chairman's semiannual testimony in Congress. On Thursday, Day 2, Sen. Evan Bayh (D) of Indiana asked what policymakers can do to spur a revival of job growth.

The backdrop for his query: Congress is considering a "jobs bill," and possibly a series of small job-related measures, aimed at that goal. These would follow the larger, $787 billion economic stimulus program signed by President Obama a year ago.

Bernanke replied that if Congress tries more spending on such stimulus measures, "it would be good to combine that" with a clear plan to get federal budgets under better control.

In response to another question, he said federal budget deficits are on track to equal 4 to 7 percent of the nation's gross domestic product annually, even after the economy recovers. "That is not a sustainable number," Bernanke said. "A rule of thumb is that … you need to have deficits more on the order of 2.5 to 3 percent" of GDP, in order to keep public debts from spiraling out of control.

Bernanke wasn't urging an immediate cutback in government spending – a move that most economists say would be unwise given the weak state of the economy now. But establishing solid plans to rein in deficits could pay dividends today, he said.

Some economists agree that this move could help revive economic confidence and investment by signaling that America will remain on solid financial footing. Without a plan to control deficits, the future of rising national debt could weigh on consumers and investors, offsetting the intended stimulus of any jobs bill.

Simon Johnson, a former chief economist of the International Monetary Fund, made a similar case in another recent congressional hearing.

"Without a viable medium-term fiscal framework, there is not much room for further stimulus" to be effective, Mr. Johnson told a Senate Budget Committee hearing this month.

Others counter that so far, there's hardly an investor revolt against Treasury debt or the US dollar. More stimulus spending can be helpful, they argue, even if plans to curb future deficits don't emerge alongside congressional job bills.

Bernanke didn't call the current stimulus efforts ineffective. But with the nation's unemployment rate near 10 percent, the economy is faring worse than forecasters expected when President Obama signed the Recovery Act last February.

His testimony came just after the Labor Department reported weekly claims for unemployment benefits came in higher than expected – at 496,000. That number needs to fall considerably before the economy will return to a period of positive job growth.

His views also resonate on a day when the bigger Washington news was a summit on healthcare, the area where government spending is set to soar fastest in coming years. Talks in Congress this year haven't produce much in the way of cost-taming plans on healthcare, and the Senate defeated a measure designed to force a vote on broader fiscal reforms.

The Fed chairman says America's two big deficits – jobs and budget red ink – are linked. Do you agree? Let us know on Twitter @CSMecon or Facebook.

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