In his semiannual report to Congress on monetary policy last week, Federal Reserve Chairman Ben Bernanke threw in some solid advice on fiscal policy as well. Let’s hope lawmakers were listening.
While some progress has been made toward reducing federal deficits over the next few years, he said, a “substantial portion” of that progress “has been concentrated in near-term budget changes, which, taken together, could create a significant headwind for the economic recovery.” That includes the sequester that began to take effect last week.
At the same time, Bernanke warned, “the difficult process of addressing longer-term fiscal imbalances has only begun. Indeed, the CBO projects that the federal deficit and debt as a percentage of GDP will begin rising again in the latter part of this decade, reflecting in large part the aging of the population and fast-rising health-care costs.”
To address both near-term and longer-term issues, he urged Congress and the administration to “consider replacing the sharp, front-loaded spending cuts required by the sequestration with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run.”
With Congress about to consider budget plans for both the rest of this fiscal year as well as Fiscal 2014, Bernanke also offered a timely reminder that “not all tax and spending programs are created equal with respect to their effects on the economy.”
That’s why, as the Fed chairman noted, policymakers “should not lose sight of the need for federal tax and spending policies that increase incentives to work and save, encourage investments in workforce skills, advance private capital formation, promote research and development, and provide necessary and productive public infrastructure.”