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Bernanke Sidesteps Tug of War Over Taxes, Entitlements Bernanke Sidesteps Tug of War Over Taxes, Entitlements

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Bernanke Sidesteps Tug of War Over Taxes, Entitlements


Federal Reserve Chairman Ben Bernanke testifies during a hearing of the House Financial Services Committee on March 2, 2011.(Jonathan Ernst/Getty Images)

With debate over how to raise the debt limit before August 2 taking center stage on Capitol Hill, Republicans and Democrats took turns on Wednesday trying to prod Federal Reserve Board Chairman Ben Bernanke to take a position on reducing entitlements spending versus raising taxes, hoping to add credibility to competing positions.

Bernanke argued for balancing the government’s books by reforming the tax code and looking at long-term spending reductions while avoiding immediate sharp cuts that he said could weaken the economic recovery. But he refused to advocate specifics.


“My question is going to focus on the revenue side,” said Rep. Ed Perlmutter, D-Colo., at the Fed chairman’s semi-annual hearing on the economy before the House Financial Services Committee. “As part of this big, bold plan... I think it’s got to have a revenue side to it as well as… entitlements. Do you agree?”

Bernanke dodged.

“I hope you understand I’m not going to take sides on this issue. I want to see the numbers add up. I want to see the revenues and the expenditures balance. It’s your job. That’s why you make the big bucks,” Bernanke said.


Financial Services Chairman Spencer Bachus, R-Ala., asked Bernanke to explain how spending on entitlement programs makes it harder to balance the budget.

“If we don’t solve entitlements, I think we make your job a lot harder,” Bachus said. “Give us your ideas on… what we ought to do.”

Bernanke tried to chart middle ground while stating the obvious: At the current pace of spending and levels of revenue, current entitlement programs are unsustainable.

“We have an aging society, health care costs are rising more quickly than GDP, and this picture shows ultimately maintaining the tax rates at the level they currently are would be inconsistent with maintaining those levels of benefits,” he said.


Rep. Jeb Hensarling, R-Texas, chairman of the GOP conference, tried to drive the point that taxes weren’t the answer. “The president said if you look at the numbers on Medicare, we will not be able to sustain that program no matter how much taxes go up.”

Bernanke wouldn't bite.

“As you know, Medicare is not a fully funded program. The premiums that are paid in only cover a portion of costs,” he said. “From an economic point of view, it’s clear that the increase in health costs, the aging population making this a larger and larger part of our economy, means it is going to be very difficult to find revenues to finance it in its current form.”

When asked what Congress can do to improve the job market, Bernanke emphasized that unemployment is the other financial crisis the country is dealing with besides the precarious fiscal situation.

“So many people have been out of work for so long that it is going to be hard to get them back to anything like they kind of jobs they had before they lost their jobs in the recession. So it’s a major problem,” he said.

Again, Bernanke exercised his characteristic caution.

“For Congress -- I need to be careful not to endorse specific programs -- but as I mentioned, one thing to try to take into account is to try to avoid sharp retractions in the near term that might weaken the recovery.”

He did urge job training, reforming the tax code, and focusing on improving the housing market, which he said "is an area that should get more attention because that is one of the major reasons why the economy has grown so slowly.”

And, of course, Bernanke was asked about the consequences of failing to increase the debt limit in time.

He said the president is correct that Social Security benefits or military paychecks could be halted, which could also a trigger a downgrade on the U.S. credit rating.

“Immediately there would have to be something on the order of a 40 percent cut in outpayments. The assumption is that, as long as possible, the Treasury would want to try to make payments on principal and interest on the government debt because the failure to do that would put the financial system into enormous disarray and have major impacts on the global economy,” Bernanke said. “So just as a matter of arithmetic, fairly soon after that came there would have to be significant cuts in Social Security, Medicare, military pay, or some combination of those in order to avoid borrowing more money.”

This article appears in the July 13, 2011 edition of National Journal Daily PM Update.

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