Bernanke: Get Government Spending Under Control to Spur Economic Growth Today Fed Chairman also testifies on the need to enact pro-growth tax reform and get health care costs under control. February 9, 2011
WASHINGTON – The House Budget Committee held a hearing today on the state of the U.S. economy. Federal Reserve Chairman Ben Bernanke testified that spending controls and long-term reforms could provide an immediate boost to economic growth and job creation.
Chairman Paul Ryan asked Bernanke to sum up his view on the nation’s unsustainable fiscal trajectory and its effect on the economy:
RYAN:“To summarize, you do believe that one of the best things we can do for short-term economic growth is to put out a plan that actually stabilizes our fiscal picture, that actually gets our liabilities under control, and shows with confidence that we have the right trajectory because we’ve addressed the programs – which are spending programs – that are getting us out of control. Is that the case?”
BERNANKE: “That’s correct.”
Later, in response to a question from freshman Representative Bill Flores of Texas, Bernanke elaborated on his view that long-term cuts and controls are necessary to restore the confidence that businesses need to create jobs and invest in the future:
FLORES: “Which direction do you go first [in order to get our fiscal house in order]? Do you reduce spending? Do you raise taxes? What’s the recommended approach?”
BERNANKE: “The spending vs. taxes, or the composition of spending and taxes, is a congressional prerogative and a congressional responsibility, but the right way to do this… is to talk about longer-term windows… and take actions which are credible, that will cut spending, perhaps in the near term, but will cut spending more as you go forward in time – or raise taxes if that’s the decision Congress makes.
“This is a long-term problem… so anything that can be done now to change that path… are the kinds of things that will be effective and have good impacts on the current economy, on current interest rates, as well as restore confidence in our fiscal policy.”
Chairman Bernanke emphasized the importance of keeping our budget debates focused always on economic growth. At one point, Bernanke illustrated the pro-growth approach to tax policy by outlining some reforms he’d like to see to the corporate tax code:
BERNANKE:“I think one direction that should be considered would be in the corporate tax code, for example, to reduce a lot of loopholes, to broaden the base, and therefore be able to lower the tax rate, which is now soon going to be the highest in the industrial world, so that the decisions made by corporations are based not on tax distortions but rather on the economics of where, for example, they should locate their plants.
“So I do think that growth-friendliness is a very important part of this [debate], and that lower rates with a broader base is something that most economists would agree is a good direction to go in the tax code.”
Bernanke was also asked to comment on the Democrats’ decision to rebrand government spending as “investment,” and in particular whether “investments” in the form of increased federal spending on education were likely to pay large economic dividends in the future. Bernanke was clear: Simply throwing more money at a broken system won’t help more Americans acquire the skills they need to succeed.
To add some background to Bernanke’s point: From 2000 to 2008, inflation-adjusted federal spending on Department of Education programs went up by nearly 60 percent. Since 2008, the Democrats’ spending spree under President Obama has added another 11 percent to the Department’s budget – and that number doesn’t include a massive infusion of $97.4 billion in stimulus funds. (To learn more about the Democrats’ reckless spending spree on government agencies: The Democrats' Spending Spree)
BERNANKE:“The Department of Education is certainly one place that can help review and understand what’s working and what’s not working. As a country, we’re having sort of a crisis of confidence that we know how to provide broad-based skills. So I think that’s really part of the problem. It’s not just resources, it’s also: How do we do this better? It’s not clear that our models are working very well right now.”
Finally, Representative Todd Akin of Missouri, who is new to the Committee, asked Bernanke about out-of-control health care costs, which are driving the rapid growth of our deficits and debt. Bernanke’s response indicated that he doesn’t think the Democrats’ new health care law would significantly reduce the strain that health care costs are putting on the nation’s finances.
AKIN:“Don’t we have to deal with the entitlements just by definition, or can we actually make [the fiscal gap] up by just doubling taxes and hope there’s going to be a ton more revenue?”
BERNANKE:“Well, as you point out, in the long run, at the rate we’re going, entitlements plus interest would basically be the entire government’s budget, unless you raise taxes considerably. Now, it’s up to Congress to find the right balance between taxes and cuts and so on, of course. But I think you need to look seriously, particularly at health care costs, which is, of course, part of what’s been going on for the past couple of years here in Congress. But I think a focus on the cost side is important. It would be difficult, I think… to leave health care programs untouched and still achieve budgetary balance in the next 15 years.”