Ben Bernanke: Bring down the federal debt, don't just 'stabilize' it
Reducing the debt-to-GDP ratio is the most important long-term fiscal policy for the US, said Fed Chairman Ben Bernanke during his semiannual report to Congress.
Ben Bernanke sat down in front of a microphone Tuesday and offered some blunt advice to the elected officials who have been failing to agree on a deficit-reduction plan.Skip to next paragraph
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Bring the federal deficit down, the Federal Reserve chairman said, enough that the national debt actually falls back to precrisis levels.
Chairman Bernanke's semiannual report to the Senate Banking Committee comes as Democratic and Republican lawmakers are locked in contentious debate over fiscal policy – a debate that could result in big cuts to federal spending in a “sequester” at the end of this week.
His advice also implicitly challenged President Obama’s stated goal as not sufficiently ambitious. Mr. Obama has said he’s “fighting” for a plan to “stabilize our debt and our deficit in a sustainable way for the next decade.”
Bernanke used some similar language, but suggested a much more challenging target.
“Fiscal policymakers will have to put the federal budget on a sustainable long-run path that first stabilizes the ratio of federal debt to GDP and … eventually places that ratio on a downward trajectory,” Bernanke said in his prepared testimony.
The distinction between the two goals may seem subtle, and Bernanke didn’t reference Obama or his administration by name, but the difference between Obama’s goal and Bernanke’s is many trillions of dollars over time.
During the five decades before the financial crisis, America had a national debt that, on average, totaled less than 40 percent of one year's gross domestic product, the Fed chairman said. Today the US public debt totals about 75 percent of GDP, with the number increasing if you add in obligations from the Treasury to fund Medicare and Social Security.
Bernanke suggested “replenishing this fiscal capacity,” by gradually reducing the debt-to-GDP ratio. Bernanke cited two reasons for this objective: to promote economic growth and to have a cushion against potential adversity.
Stabilizing the federal debt at the current level is better, of course, than having it continue to rise. And Obama isn’t the only one in Washington who has laid out that goal.
But Bernanke’s words Tuesday are a reminder that, to some degree, the word “stabilize” misses a central question: whether the long-run goal should be to reduce the debt.