Bernanke’s Real Message About Budget Deficits

Has Ben Bernanke suddenly become a deficit hawk? In remarks to the House Budget Committee he sounded like one — calling on Congress to come up with a plan to restore fiscal balance over the long term. “Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth.” This from a Fed Chair who’s loosened the money supply more than any Fed chair in recent history, printing money as if it were going out of style. What’s going on?

Begin with the fact that Bernanke is working more closely with the Treasury any Fed chair since the Second World War. It’s doubtful that Bernanke would make a statement like this without it being at least tacitly approved by the White House. Second, Bernanke and the Treasury know that investors are getting antsy about inflation down the road; yields on long-term bonds are increasing. Third, the White House is having trouble getting Congress to come up with some $600 billion it needs to finance universal health care.

My guess is Bernanke is trying to reassure investors he won’t let inflation get out of control in coming years. If he has to, when the economy is safely out of the morass, he’ll crank up short-term interest rates and squeeze the money supply.

But Bernanke also wants to deliver a message to Congress, a message the White House doesn’t want to deliver because it’s politically awkward: Congress will have to raise taxes on the wealthy in order to finance universal health care and reduce looming budget deficits. Such tax increases won’t slow down the economy because the wealthy don’t spend that much anyway (that’s what it means to be wealthy — you’ve already got most of what you need), but may be necessary, at least to ward off inflation fears.

What sort of higher taxes on the wealthy? Bernanke didn’t say, of course, but the White House has already floated limits on deductions and seems willing to consider taxing employee-provided health benefits for employees over a certain income. And maybe lifting the cap on Social Security payroll taxes, at least for workers earning over $250,000 a year.

Originally published at Robert Reich’s blog and reproduced here with the author’s permission.

6 Responses to "Bernanke’s Real Message About Budget Deficits"

  1. Guest   June 4, 2009 at 7:43 pm

    What if you raise taxes on the wealthy and the deficit continues to grow.Do you know what self employed people pay in social security taxes? This is honest people not tax cheating Tim at the treasury department! If you raise the cap on social security and raise taxes on the high icomes what would be the tax rate for some income bracket 60%?At what point would a person say this is not worth it!

    • Anonymous   June 4, 2009 at 9:11 pm

      We don’t seem to learn fron history. We’re determined to make the same mistakes of the past…We’ve “dumbed down” America. Our schools are a mess. Education has failed many children. We’ve lost our steel and auto industries. We’ve passed laws that require banks to loan to people who can’t pay. We can blame both Democrats and Republicans for excessive and irresponsible spending. If history is any indication of the futire, we can expect war and and/or loss of liberty.

  2. devils advocate   June 5, 2009 at 10:04 am

    tax, tax, tax…no one seriously considers ways to cut spendingmuch as we need the Govt spending, to make up for the consumer drop,if we don’t come up spending cuts that the market considers do-able– and do it!:there is no confidence in our politicians not taking the “banana republic”way outis the market not warning the Administration not to spend $600+ billions for health coverage for all-I estimate the additional costs to be approximately $150-200 billion per year -adding 50 millions of uninsured people is moralbut not at the cost of …well, everythingsome of these enormous costs would include:doctors ordering every (expensive)test and referal to specialists to cover themselves:the IT revolution means every “i” has to be dottednew huge medical insurance claims fought for by armies of lawyers:every patient would have access to their own records and pass them on to their lawyersif you laugh at this, don’t take it seriously, just look at the enormous #of TV commercials with lawyers asking to fight “for your compensation”

  3. devils advocate   June 5, 2009 at 10:08 am

    p.s. I believe that your post is correct on Bernankethe House is scheduled to come up with a viable health bill by late Julyif it’s not realistic about costs and cuts, the market going to make us pay

  4. Anonymous   June 5, 2009 at 3:15 pm

    My God, all of you are either, stupid, delusional, naive or all three.Bernanke sees the writing on the wall, and he “ain’t” gonna take it up the butt from the Obama Administration.He was covering his sorry carcass and passing the buck back to the politicians.We are in the end game and he knows it, and so does Prof. Reich. Don’t you sir?Since you’re aren’t in line for a job with the current administration, why not tell the Sheeple the truth and help them prepare while there is a little time?

  5. Guest   June 12, 2009 at 5:37 am

    Bernanke and Treasury have to understand that without reigning in inflation, the US will be dropped as the international standard (China and other countries want to do that anyway to weaken the US – which it would most certainly do). Unfortunately to actually do this means that they have to forgo the current policies that they are peddling. They simply can’t have it both ways.These comments by Bernanke is just lip service, in my opinion, because the only thing that the Fed/Govt can do in the short term is what they have been doing. Their choices are to stop with the short term policies that they have implemented and *hope* that the economy recovers, or implement them as they have been doing and hope (and pray) that the dollar doesn’t collapse – which it very well might. That would make this last year look like the good old days.Trying to save the status quo (i.e. – Wall Street and the over-financialized US economy) will likely be the end of the US as we have known it since the end of WW II.