In a surprisingly candid speech at the annual Rhode Island Public Expenditure Council meeting Monday, Federal Reserve Chair Ben Bernanke warned of a potentially dangerous economic future for the country if government spending is not curbed within a few years.
“It is crucially important that we put US fiscal policy on a sustainable path,” Bernanke said. “We should not underestimate these fiscal challenges. Failing to respond to them would endanger our economic future.”
If budget deficits continue to rise at their current pace, Bernanke said, higher interest rates could slow formation of businesses, productivity and economic growth, while a large federal debt could hurt the amount of government funds available for future emergencies, from war to natural disasters.
“The threat to our economy is real and growing,” Bernanke said.
Bernanke outlined a number of “fiscal rules” for Congress to consider implementing through legislation, including constraints on total government expenditure, deficits or debt. Today, Congress operates under a “pay-as-you-go” (PAYGO ) approach that requires tax cuts and spending increases to be offset within a ten-year budget time span, but may not be strong enough for the current economy. “The key question is whether the traditional PAYGO approach is sufficiently ambitious,” Bernanke said. “At its best, PAYGO prevents new tax cuts and mandatory spending increases from making projected budget deficits worse; by construction, PAYGO does not require the Congress to reduce the ever-increasing deficits that are already built into current law.”
Countries like Canada, Switzerland, Finland and the Netherlands have all seen marked improvements in their budgets since adopting fiscal rules that cap government spending. According to the International Monetary Fund, approximately 80 countries have implemented similar fiscal rules. “The weight of the evidence suggests that well-designed rules can help promote improved fiscal performance,” Bernanke said.
If the nation’s economic challenges are not addressed in the near future, Bernanke said, “projections by the CBO (Congressional Budget Office) and others show future budget deficits and debts rising indefinitely and at increasing rates … unsustainable trajectories of deficits and debts will never actually transpire, because creditors would never be willing to lend to a country in which the fiscal debt relative to the national income is rising without limit.”
According to the World Bank’s “Finding the Tipping Point – When Sovereign Debt Turns Bad,” the level at which a country is no longer viable to receive lending is a 77 percent public debt-to-GDP ratio. “If the debt is above this threshold, each percentage point costs 0.017 percentage points of annual real growth.”
Click here to get Truthout stories like this one sent straight to your inbox, 365 days a year.
According to the International Monetary Fund, the 2009 debt-to-GDP ratio in the United States was 83.2 percent. James A. Bacon Jr. of the Washington Examiner states, “the US is experiencing a small growth penalty today: about one-tenth of a percentage point. By mid-decade, however, the growth penalty could swell to .56 percent yearly – more than a half percentage point.”
The challenge of reducing deficit doesn’t end with capping government spending. In fact, Bernanke said, “economic conditions provide little scope for reducing deficits significantly further over the next year or two … premature fiscal tightening could put the recovery at risk.” But at the same time, “if current policy settings are maintained and under reasonable assumptions about economic growth, the federal budget will be on an unsustainable path in coming years, with the ratio of federal debt held by the public to national income rising at an increasing pace.”
Congress faces several unpopular choices to cut the deficit. The CBO has projected that federal spending for Medicare and Medicaid could be double the national income over the next 25 years. Social Security is also threatened as the country’s population ages and the number of workers paying taxes grows at a slower rate than the number of people receiving benefits. State and local budgets will also struggle to meet public pension and health care obligations for retired people. “Estimates of unfunded pension liabilities for the states as whole span a wide range, but some researchers put the figure as high as $2 trillion at the end of 2009,” Bernanke said, “[and] one recent estimate suggests that state governments have a collective liability of almost $600 billion for retiree health benefits.”
“Herbert Stein, a wise economist, once said, ‘If something cannot go on forever, it will stop.’ One way or the other, fiscal adjustments sufficient to stabilize the federal budget will certainly occur at some point,” Bernanke said. “The only real question is whether these adjustments will take place through a careful and deliberative process that weighs priorities … or whether the needed fiscal adjustments will be a rapid and painful response to a looming or actual fiscal crisis.”
Although Bernanke did not plainly endorse any particular methods of reducing the deficit, his message was clear throughout the speech. “History makes clear that countries that continually spend beyond their means suffer slower growth in incomes and living standards and are prone to greater economic and financial instability.”
We’re not backing down in the face of Trump’s threats.
As Donald Trump is inaugurated a second time, independent media organizations are faced with urgent mandates: Tell the truth more loudly than ever before. Do that work even as our standard modes of distribution (such as social media platforms) are being manipulated and curtailed by forces of fascist repression and ruthless capitalism. Do that work even as journalism and journalists face targeted attacks, including from the government itself. And do that work in community, never forgetting that we’re not shouting into a faceless void – we’re reaching out to real people amid a life-threatening political climate.
Our task is formidable, and it requires us to ground ourselves in our principles, remind ourselves of our utility, dig in and commit.
As a dizzying number of corporate news organizations – either through need or greed – rush to implement new ways to further monetize their content, and others acquiesce to Trump’s wishes, now is a time for movement media-makers to double down on community-first models.
At Truthout, we are reaffirming our commitments on this front: We won’t run ads or have a paywall because we believe that everyone should have access to information, and that access should exist without barriers and free of distractions from craven corporate interests. We recognize the implications for democracy when information-seekers click a link only to find the article trapped behind a paywall or buried on a page with dozens of invasive ads. The laws of capitalism dictate an unending increase in monetization, and much of the media simply follows those laws. Truthout and many of our peers are dedicating ourselves to following other paths – a commitment which feels vital in a moment when corporations are evermore overtly embedded in government.
Over 80 percent of Truthout‘s funding comes from small individual donations from our community of readers, and the remaining 20 percent comes from a handful of social justice-oriented foundations. Over a third of our total budget is supported by recurring monthly donors, many of whom give because they want to help us keep Truthout barrier-free for everyone.
You can help by giving today. Whether you can make a small monthly donation or a larger gift, Truthout only works with your support.