Bernanke Warns About Fiscal Crisis
Fed Chairman Ben Bernanke warned that the grim fiscal outlook threatens the future of the American economy. The problem is simple: spending obligations are far, far, far in excess of expected revenues for the next several decades. Economic growth is extremely unlikely to solve the problem. In the second link the GAO estimates that economic growth has to be in the double digits to solve the problem as they look now.
However, I’d argue that such a view is overly optimistic. Why? Because typically estimates for government programs like the Prescription Drug Program (PDP) have historically been under-estimates. That is, the $9 trillion that the PDP is estimated to cost is probably too low. After all, I doubt most estimates successfully factored in the effect of the program (a subsidy) will have on the price of prescription drugs. This kind of simultaneity problem in modelling is a tough nut to crack.
And how large is this burden? The burden that we are currently facing (using the GAO estimates) break down as follows:
- Per Person: $156,000
- Per Worker: $375,000
- Per Household: $411,000
And keep in mind this isn’t simply the tax burden, but the burden of the short fall alone. That is, it will have to be added on to the estimated future tax burdens. In short, current taxes are too low given current spending obligations.
Bernanke cautioned that supporters of low taxes must ensure that spending is “kept low as well,” while backers of “more- generous benefits payments” must recognize that higher taxes may have “adverse” consequences for the economy.
“Crucially, whatever size of government is chosen, tax rates must ultimately be set at a level sufficient to achieve and appropriate balance of spending and revenues in the long run,” Bernanke said. He added that the “general” view is that tax cuts “don’t pay for themselves.”
What is going to have to happen is some combination of the following:
- current spending obligations will have to be reduced,
- expected tax revenues will have to be raised (i.e. raise taxes).
“If early and meaningful action is not taken, the U.S. economy could be seriously weakened,” Bernanke told the Senate Budget Committee.
My guess is nothing will happen and the economy will weaken.