Federal Reserve Chairman Ben Bernanke, who usually speaks in a code even many economists can’t crack, delivered a stern message last week that was as clear as it was sobering.
“To avoid large and ultimately unsustainable budget deficits,” he said, “the nation will ultimately have to choose among higher taxes, modifications to entitlement programs such as Social Security and Medicare, less spending on everything else from education to defense, or some combination of the above.”
The latter choice seems most likely, given a national debt that’s expected to reach $14 trillion next year, nearly triple what it was just 10 years ago.
None of the choices will be popular, which is why neither Democrats nor Republicans are rushing forward with specific proposals.
But the risk of continuing to ignore them, Bernanke stressed, is that “in the longer run we will have neither financial stability nor healthy economic growth.”
In other words, the United States’ position as global economic leader will be but a memory. The recent recession? It’ll seem like the good ol’ days in comparison.
A bipartisan deficit-reduction commission created by President Obama will soon begin tackling the problem. The 18-member panel — co-chaired by former Clinton administration chief of staff Erskine Bowles and former GOP Sen. Alan Simpson of Wyoming — is to forward non-binding recommendations to Congress after this year’s mid-term elections. If it can agree on them, that is. At least 14 members must sign on for any solutions to go forward.
That will take compromise — no easy task these days. If Republicans stand firm against any increase in taxes, or if Democrats won’t give in on cuts to entitlements and other programs, chances are nothing will happen and we’ll be that much closer to a real economic crisis.
If, however, the panel can put practical solutions ahead of ideology and demand some sacrifice from everyone, Bernanke suggests it could have a powerful impact. If Congress approves a credible plan to reduce long-term deficits, Bernanke said, it could boost the economy by enhancing investors’ faith in the nation’s financial health. That could lead to lower interest rates, which would spur growth in housing and just about every other sector of the economy. That means jobs and prosperity.
The problem is so large, though, that it’s hard to imagine an effective plan that doesn’t include a combination of tax hikes, spending cuts and reductions in entitlement benefits.
The question is whether leaders in both parties will summon the political courage that Bernanke is so clearly urging. Eighteen members of a bipartisan commission have the first shot at an answer.
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