Fed Chairman Ben Bernanke
I was encouraged to see Fed Chairman Ben Bernanke’s honest assessment of our country’s economic health during his testimony before the House Committee on the Budget last Wednesday:
“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. A variety of projections that extrapolate current policies and make plausible assumptions about the future evolution of the economy show a structural budget gap that is both large relative to the size of the economy and increasing over time.”
In his testimony, Bernanke laid out the good, the bad and the long-term prognosis for our economy. Here’s my summary:
The good news
Thanks to the stimulus investment and good policy in the face of the financial crisis, the economy is improving or is likely to improve in the following ways over the next few years:
- GDP will increase 3.5 percent.
- Consumer spending will increase 3.5 percent.
- Outlay among business for equipment and software is on the rise.
- U.S. manufacturing rose at an annual rate of 9 percent over the first four months of the year.
- The effects of the European crisis on the U.S. economy should be moderate, presuming that leaders continue to work together.
The bad news
- Although sales and construction of homes have improved due to the homebuyer tax credit, this is likely a temporary shift because there are too many vacancies and builders are having a hard time getting credit (which makes sense because there are more houses than buyers right now).
- Unemployment will remain high for a while. It will take a “significant amount of time” to regain the more than 8 million jobs lost in 2008 and 2009.
The future
- Thanks to the stimulus and coordinated global leadership, the effects of the recent recession will be painful but not catastrophic, as was previously feared.
- As the baby boomers age, the ratio of people paying into the system to people taking benefits from the system (currently 5 to 1) is becoming smaller. By 2030, there will only be three people paying into the system for every person taking benefits. This ratio endangers our long-term economic sustainability.
Bernanke closes with the following fare-thee-well: “Unless we as a nation make a strong commitment to fiscal responsibility, in the longer run, we will have neither financial stability nor healthy economic growth.”
So?
I draw the following conclusions from Bernanke’s testimony:
- The stimulus has worked to prevent a depression and soften the impact of the recession. The recovery has been and will continue to be hard on a lot of people but the worst has been averted.
- Structural problems render our current tax and benefits structure unsustainable. Most of the experts agree that the best middle path doesn’t involve a doomsday scenario of drastically raising taxes and cutting benefits, but rather a combination of both moderate tax increases and reduction of tax exemptions and loopholes and modifications to the benefits we can afford to extend (such as raising the retirement age by a few years).
The bottom line, according to Bernanke and others, is that our way of life cannot last unless we address our fiscal problems. We cannot sustain an economy that has more money going out than coming in.
And on the homefront…
According to the Las Cruces Sun-News, the county commission here in Doña Ana County is considering placing a sales tax question before voters in a special referendum election, perhaps as early as the end of this year. The increase would attempt to deal with our budgetary shortfalls — the most expensive of these increases would add about 25 cents for every 100 dollars spent. The commissioners claim that they have done all they can to streamline processes — including cutting spending the last two years and withholding employee raises — and that without this increase, the county’s ability to deliver essential services will suffer.
From the comments after the article, it’s clear that many people do not support any type of tax increase. But the truth remains that something must be done.
Can We Handle the Truth?
The truth is that we must radically optimize government (including cutting waste and eliminating tax loopholes and noncompliance) and will still likely need to raise taxes and cut or modify services to stay solvent. It’s not going to be fun or easy.
But can we handle the truth? Can we get beyond our knee-jerk, partisan talking points and hot-button issues to elect leaders who will deal with the institutional problems we face? Can the public be bothered to meaningfully engage with public policy so that we get a solution that is based in the best interest of the country not just local constituencies?
If not, who is at fault? We all are.
Nick Voges is the blogger behind NMPolitics.net’s Zeitgeist. E-mail him at nick@nmpolitics.net.