Is Bernanke Nudging Obama on Deficits?

The most interesting part of Fed chairman Ben Bernanke's testimony this morning before the House Budget Committee was his unambiguous emphasis on the need to reduce future federal budget deficits. Although there was no explicit criticism of the Obama Administration in his prepared testimony, he suggested that deficit reduction needed to go well beyond announced plans. He repeated the projected deficits for fiscal 2009 ($1.8 trillion), 2010 ($1.3 trillion) and 2011 ($900 billion). The ratio of federal debt to GDP (gross domestic product) would go from about 40 percent in 2008 to 70 percent in 2011, the "highest level since the early 1950s." Interestingly, he used the Congressional Budget Office's projections and not the Administration's slightly more optimistic estimates. "With the ratio of debt to GDP already elevated, we will not be able to continue borrowing indefinitely to meet these demands," he said. The implication was that Congress and the White House needed to balance the budget and not merely reduce budget deficits, as the Obama projections indicate. Bernanke has supported large deficits to combat the recession, but he clearly thinks that there are limits.

Bernanke also reiterated the Fed's view that the economy will turn up sometime in the last half of the year. But he elaborated by saying that the forecast was premised on a) the belief that "consumer spending and housing demand will stabilize"--steep declines will no longer be a drag on growth; b) "the pace of inventory liquidation will slow" and also will cease being a major drag; and c) there will be a "continuing gradual repair of the financial system and an associated improvement in credit conditions." Despite a bottoming out of the downturn, Bernanke repeated his earlier assessment that unemployment would continue to rise for some time.