Here’s how dire the U.S. budget problem is: Even Ben Bernanke isn’t downplaying it.
Bernanke, the Federal Reserve chairman, spent years rationalizing the housing bubble. He infamously claimed the subprime mess was contained, just before it nearly overwhelmed the U.S. economy.
But the unhappy implications of the U.S. budget deficit are so glaring that even Bernanke’s blinders are no match.
The Fed chief said in testimony before the House budget committee Wednesday that “the federal budget appears to be on an unsustainable path.” Not for the first time, he urged Congress to take action to close “a structural budget gap that is both large relative to the size of the economy and increasing over time.”
The problem isn’t just that the United States is on track to run a budget deficit worth a tenth of its economic output this year, or that the gap will close only gradually in coming years.
The bigger issue, Bernanke notes, is that the workforce isn’t growing nearly fast enough to pay for all the people who stand to retire over the next two decades. This isn’t a problem that can be dealt with via tax reform or federal spending cuts alone — not that those are exactly coming fast and furious as it is.
There are currently five workers for every retiree in the country, Bernanke said. That stands to shrink to three workers by 2030 — at a time when “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.”
That’s not a workable formula, and Bernanke urged policymakers at the very least to work out some plans for restoring fiscal balance. The problem, as he surely knows, is that he and others have been sounding similar warnings for years, to little avail.
Indeed, Bernanke on Wednesday repeated a sentence he used in his testimony before the budget committee last June: “Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” he said.
Unfortunately, repetition doesn’t count for much in this arena. Wonks with greater stature than Bernanke have been calling for the same sort of buckling down — and remain pessimistic that Washington will act before it’s too late.
Restoring the nation to fiscal health and dealing with other major challenges “will require a greater sense of common purpose and political consensus than has been evident in Washington or the country at large,” former Fed chief Paul Volcker wrote last month.
Were the bond vigilantes to suddenly visit the Treasurys market, all hell could break loose in an economy that seems addicted to low interest rates. While the euro zone and Japan obviously have their problems, markets are nothing if not unpredictable.
Let’s hope we never find ourselves toasting Bernanke as one of the guys who predicted the next crisis.
