Rep. Andrews Questions Fed Chairman Bernanke on Economic Outlook

I recently questioned the Chairman of the Federal Reserve Ben Bernanke on the federal government’s long-term budgetary situation in a hearing of the House Budget Committee.  In particular, I expressed my concern over the solvency of entitlement programs like Social Security and Medicare.  The continuing budget deficit is troubling and could one day become so large that the long term value of the stock market would drop, significantly damaging our economy.  I believe the time is now for the federal government to begin to resolve its significant liabilities and embrace fiscal responsibility. 

I have included my testimony from the recent Budget Committee hearing with Chairman Bernanke here.

ANDREWS: Thank you, Mr. Chairman.

And thank you, Mr. Chairman, for your very edifying testimony. I wish every member would read it. I think it's very, very edifying.

You describe our budgetary situation as the calm before the storm. And I think you very correctly identify the storm as being severe consequences for the economy if capital pools are drained, if the price of capital rises, if we continue a policy of borrowing our way to an illusionary prosperity.

One of the metrics that you discuss as a way of measuring our progress toward avoiding that storm or preparing for that storm is the idea of the measurement of the long-term solvency of entitlement programs such as the long-horizon present values of unfunded liabilities for Social Security and Medicare.

Do you think that there are benchmarks that the markets are going to express and manifest as to which benchmarks we have to hit on that issue?

Asking the question another way: My understanding is we are adding each year to the present value of those unfunded liabilities by failing to take action on entitlement reform. And we're also adding to it by failing to put away Social Security surpluses which could be saved for those forthcoming problems.

Do you think that the market will manifest a benchmark where, if the unfunded liability grows too large and the time before the storm starts grows too short, that the markets will begin to punish us with higher long-term interest rates?

And if so, what would you think those benchmarks are both in terms of size of the unfunded liability and distance from the storm?

BERNANKE: I think it'd be hard to give you exact numbers. Thus far, the treasury market has very willingly financed the government. Real interest rates are low; they haven't come up much.

I would think that concerns would begin to mount if the government got to the point where it was coming closer to one of these snowball situations where the accumulation of interest on the debt was adding to the debt which was adding to the debt.

If that looked to be something that was inevitable and that it was becoming increasingly unlikely that the Congress was going to be able to address that -- and, again, the closer you get to that, the harder it is -- then I think capital markets would become concerned about it.

ANDREWS: We, as you know, deal in five-year budget windows in the resolutions that the committee addresses. Could you give us a perspective as to what the markets would regard as a successful five- year project that would either reduce the unfunded liabilities or at least let their rate of growth slow? Is there a target we should be shooting at in the five-year window?

BERNANKE: Well, as I indicated, you need multiple indicators. And I'm not sure that the five-year window sufficiently captures the long-run imbalances.

So it would be interesting to look at projections, as we saw on the screen a while ago, of the imbalance at 10, 15, 20 years down the road and steps that move in the direction of ensuring that those imbalances are being closed.

And I think just moving in the right direction is important.

ANDREWS: Assuming that we were able to enact a budget resolution that during the five-year window stopped the process of using the Social Security surplus and began to bank it or save it toward reducing this future unfunded liability by making it funded, would you regard that as a positive development?

BERNANKE: I think it would be extraordinarily difficult to move that far to on-budget surplus in a few years, within five years.

ANDREWS: But if it were, would it be a positive development?

BERNANKE: Well, we would have to -- the Federal Reserve would have to offset the short-term spending effects of that with lower interest rates. But that would be...

ANDREWS: Do you promise us lower interest rates if we do that? Is that what I just heard?

(LAUGHTER)

BERNANKE: If you do that, we will do our best.

But what we would do is we would respond in such a way as to try and keep the economy at full employment.

ANDREWS: I understand.

BERNANKE: But I think if you can demonstrate a plan that seems plausible and make a downpayment on it, if I may say so...

ANDREWS: Yes.

BERNANKE: That would be, certainly, the right direction and would...

ANDREWS: I think one of the...

BERNANKE: .. be reassuring.

ANDREWS: ... imperative projects of this committee is to define plausibility. And we need your input on that and those of other leaders.

And I thank you very much for your testimony and for answering my questions.

BERNANKE: Thank you.

ANDREWS: Thank you, Mr. Chairman.

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