from Follow the Money

Bernanke’s testimony …

January 18, 2007

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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I suspect I am in a minority of one, but I liked Bernanke’s speech in Beijing better than his testimony today.  

 

Bernanke is always reality-based; his testimony was well-sourced.   And like Mark Thoma, I appreciated that Dr. Bernanke noted that a fiscal deficit can be closed by raising revenues as well as reducing expenditures, and that is fundamentally a political choice.   

So my concerns are more about the relative emphasis placed on different points.

I agree with Mark’s argument that the speech lumped together Social Security and Medicare a bit too much.    The “entitlements” framing implicitly suggests cutting Social Security benefits are a solution to a set of fiscal pressures that do not primarily stem from rising Social Security benefits.    

That matters, because, among other things, Social Security is among the best insurance programs low wage Americans have against technological change – or intensified global competition – that cuts into their earnings late in their career.   it is a rare bit of existing "globalization" insurance.

Bernanke implicitly noted that Social Security has a large current cash flow surplus by highlighting the difference between the unified deficit and the on-budget deficit.   The gap is largely the surplus in the Social Security system.  But that point could have been made explicit – and connected to the points Bernanke makes about the aging of the baby boom.   The whole point of raising payroll taxes in advance of the baby boom was to help minimize the need to increase payroll taxes when the baby boom retires. 

Of course, paying the Social Security system back when the baby boom retires requires changes in other parts of the government – whether higher taxes or less spending.

That’s why I thought that a bit more emphasis should have been placed on current gap between what the government takes in (from sources other than Social Security) and what it spends (on sources other than Social Security).  The structural non-Social Security deficit now looks to be between 3 and 3.5% of GDP.    (Details and supporting links can be found in this post). 

Absent the Social Security surplus, that gap would generate some of the negative public debt dynamics Dr. Bernanke accurately described.

Emphasizing rising entitlement spending puts the emphasis on cutting entitlement spending.   Emphasizing the gap between what the government takes in now and what it does now – a gap that is far bigger today than a few years ago – puts the emphasis on the set of policy decisions that created the current gap.   Cutting taxes.   A far more expensive than initially forecast invasion of Iraq.

Because future entitlements are specified by law they are possible to project into the future.  Because lots of other things aren’t written into law and mandated from here until 2100, they are harder to project.  But the non-entitlement government won’t go away.   And it also needs to be paid for.  Unfunded mandates are bad.  But so is an under-funded government.

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