Federal Reserve Chairman Ben Bernanke testified today before the House Budget Committee. Although his testimony is fairly succinct by itself, I have found that few people actually read Congressional testimony, so here is a summary. Where possible, I use the Chairman’s words. His comments on the budget (last section) are getting the most press attention.
The U.S. Economy
“Moreover, the economy–supported by stimulative monetary policy and the concerted efforts of policymakers to stabilize the financial system–appears to be on track to continue to expand through this year and next.”
- The Fed’s April forecast projected that GDP would grow around 3.5% this year, and “at a somewhat faster pace next year.”
- Economically and politically critical: “This pace of growth, were it to be realized, would probably be associated with only a slow reduction in the unemployment rate over time.”
- “In this environment, inflation is likely to remain subdued.”
He argues against a “double dip recession”:
Although the support to economic growth from fiscal policy is likely to diminish in the coming year, the incoming data suggest that gains in private final demand will sustain the recovery in economic activity. Real consumer spending has risen at an annual rate of nearly 3-1/2 percent so far this year, with particular strength in the highly cyclical category of durable goods. Consumer spending is likely to increase at a moderate pace going forward, supported by a gradual pickup in employment and income, greater consumer confidence, and some improvement in credit conditions.
He thinks business investment will likely be strong.
He identifies the ongoing overhang of excess housing supply as well as commercial buildings as a “significant restraint on the pace of recovery.” He also cites “pressures on state and local budgets, though tempered somewhat by ongoing federal support” as another restraint.
On the employment picture he emphasizes that it’s going to take a long time to close the employment gap:
Private payroll employment has risen an average of 140,000 per month for the past three months, and expectations of both businesses and households about hiring prospects have improved since the beginning of the year. In all likelihood, however, a significant amount of time will be required to restore the nearly 8-1/2 million jobs that were lost over 2008 and 2009.
He doesn’t sound too worried about inflation:
But aside from these volatile components, a moderation in inflation has been clear and broadly based over this period. To date, long-run inflation expectations have been stable …
Developments in Europe
“U.S. financial markets have been roiled in recent weeks by these developments
He endorses the European actions:
The actions taken by European leaders represent a firm commitment to resolve the prevailing stresses and restore market confidence and stability. If markets continue to stabilize, then the effects of the crisis on economic growth in the United States seem likely to be modest. Although the recent fall in equity prices and weaker economic prospects in Europe will leave some imprint on the U.S. economy, offsetting factors include declines in interest rates on Treasury bonds and home mortgages as well as lower prices for oil and some other globally traded commodities.
In many ways, the United States enjoys a uniquely favored position. Our economy is large, diversified, and flexible; our financial markets are deep and liquid; and, as I have mentioned, in the midst of financial turmoil, global investors have viewed Treasury securities as a safe haven. Nevertheless, history makes clear that failure to achieve fiscal sustainability will, over time, sap the nation’s economic vitality, reduce our living standards, and greatly increase the risk of economic and financial instability.
On the short-term budget picture:
Our nation’s fiscal position has deteriorated appreciably since the onset of the financial crisis and the recession. The exceptional increase in the deficit has in large part reflected the effects of the weak economy on tax revenues and spending, along with the necessary policy actions taken to ease the recession and steady financial markets. As the economy and financial markets continue to recover, and as the actions taken to provide economic stimulus and promote financial stability are phased out, the budget deficit should narrow over the next few years.
I assume the Administration will see the Chairman’s “necessary policy actions taken to ease the recession and steady financial markets” language as an endorsement of the stimulus.
“Even after economic and financial conditions have returned to normal, however, in the absence of further policy actions, the federal budget appears to be on an unsustainable path.”
Finally, he gives the reasons (plural) for our long-term budget challenge:
Among the primary forces putting upward pressure on the deficit is the aging of the U.S. population, as the number of persons expected to be working and paying taxes into various programs is rising more slowly than the number of persons projected to receive benefits. Notably, this year about 5 individuals are between the ages of 20 and 64 for each person aged 65 or older. By the time most of the baby boomers have retired in 2030, this ratio is projected to have declined to around 3. In addition, government expenditures on health care for both retirees and non-retirees have continued to rise rapidly as increases in the costs of care have exceeded increases in incomes. To avoid sharp, disruptive shifts in spending programs and tax policies in the future, and to retain the confidence of the public and the markets, we should be planning now how we will meet these looming budgetary challenges.
Three cheers for the Chairman for identifying both demographics and growth in per capita health spending as drivers of our long-term budget challenges. If you listen to the Administration, you won’t hear about demographics, only health care costs.
(photo credit: official portrait on Wikipedia)