Bernanke: ‘Things Will Come Apart’ If Entitlements Are Not Reformed and Spending Controlled
June 9, 2010Federal Reserve Chairman Ben Bernanke on Wednesday warned Congress that 'things will come apart' if Congress allows federal entitlement programs and the deficit spending they cause are not put on a sustainable path.
Speaking at a hearing of the House Budget Committee, Bernanke offered his dire prediction after being asked what would happen if Congress did not take action to head off the impending crisis brought on by unsustainable entitlement spending, led primarily by Medicare.
“The entitlement programs are not self-funded,” Bernanke said, “they are unfunded liabilities. They are the single biggest component of spending going forward.”
Bernanke said that there were several ways Congress could fix these problems, which amount to approximately $53 trillion in unfunded liabilities, but that eventually Congress must address the issue.
“There are various ways you could address this – you can restructure entitlement programs [or] you can cut other things – but at some point you need to address the overall budgetary situation. If you don’t, you’ll get a picture like this one [pointing to a graph showing a steep rise in interest rates and debt] where interest rates are rising and debt outstanding is growing exponentially.
“At that point, things will come apart,” he said. “This [rise in debt] will stop, but it might stop in a very unpleasant way in terms of sharp cuts, a financial crisis, high interest rates that stop growth, [or] continued borrowing from abroad.”
Bernanke said that some kind of action must be taken within the next few years, because even the levels of debt projected by the Obama administration to occur in the years between now and 2020 were “not sustainable.”
“Right now, the various estimates of the CBO and the OMB – under different scenarios – show a structural deficit from, say 2013 to 2020, are between 4 and 7 percent of GDP, which is not sustainable,” he said.
“So I would say medium term [when those structural problems should be addressed] is three to five years out in the future and of course the situation gets much more difficult around say 2020 when the entitlement spending becomes even greater.”
Bernanke said that while the budget cannot be balanced immediately, lest Congress risk undoing the nation’s budding economic recovery, the government must demonstrate that it has a plan for returning the nation to fiscal sanity.
“I think we need to show that within a few years we’re going to go clearly to a path where the debt-to-GDP ratio remains more or less stable, in other words that line in that picture [indicating the debt-to-GDP chart showing unsustainable growth] is flat or going down, rather than rising,” he explained.
“As long as that can be persuasively shown to the public and to the markets I think that would be a very important step.”
Bernanke also said that the best way for Congress to strengthen the economic recovery would be to stop borrowing and begin to get its fiscal balance sheets in order, saying that it was better policy to extend things like unemployment benefits and aid to states in a fiscally balanced way, rather than through continued borrowing.
“Maintaining a strong recovery and keeping interest rates low would be assisted by a commitment by Congress to bring the deficit to a sustainable level and the debt to a relatively flat level [compared] to GDP over the medium term,” he said.
“To the extent that you [Congress] decide to undertake short-term spending programs, whether it’s to help the unemployed, provide training, to help state and local governments, or to provide infrastructure, those are the kinds of choices that you’re looking at, to the extent you do that you will be more effective and safer to do that on a twin-track basis where on the other track you’re also thinking about the longer term. That’s my message,” he said.