WASHINGTON DC: Hawaii’s newly elected GOP District 1 Congress member Charles Djou has been in office just two weeks, but June 9, 2010, he made the national news for his exchange over federal stimulus funds with Federal Reserve Chairman Ben Bernanke.

(See related Hawaii Reporter live interview with Djou here: http://www.ustream.tv/recorded/7546334/)

In a House Budget Committee Hearing yesterday, Bernanke admitted that the US Congress does not have a strategy to get American out of debt.

Djou asked, “Do you, right now, see any exit strategy—fiscal exit strategy—out of the United States Congress?”
Bernanke answered: “… right now, there’s not anything on the table at this point.”

If Congress plans a second round of stimulus funds, it is vital that Congress plans a “fiscal exit strategy,” Bernanke told Djou.

“If you decide to do more fiscal stimulus, and I know that there are some moderate-sized bills being contemplated, it will be very helpful to combine that—again, I’m reiterating this point, but I think that it’s very important—with a plan for a fiscal exit strategy. The Federal Reserve has a strategy for exiting from our monetary policy, the United States Government, fiscal authorities have to have a strategy for exiting from your fiscal policy. So, you will have a more effective set of policies if you combine any expansion of further fiscal support with other measures that reassure markets that in fact our deficits will be controlled in the medium term.”

The ‘federal budget appears to be on an unsustainable path;’ Bernanke testified, leading Djou to ask: “how will we know when it is on a sustainable path? What triggers, what benchmarks would you guide the Congress on to know that we are on a sustainable path? Is there an amount of the budget deficit that you think we should be looking at, the percentage of GDP that the budget deficit should be at?”

One simple rule, Bernanke says, is that the “primary deficit, which is the deficit excluding interest payments, should be about in balance. If that is true—or put another way, that the deficit equals the interest payments, so in practice that might be two percent of the deficit—then arithmetically with some other assumptions, it turns

out that the ratio of the debt outstanding to the GDP remains constant. So I think keeping our debt relative to our income constant or declining would be a good indicator of sustainable policy.”

But there is no immediate end in sight to America’s fiscal problems. Bernanke says: “Well, I don’t think that there’s any way that the deficit this next year is going to be brought down to two percent or three percent (estimated $300 billion) and as I’ve been emphasizing this is really a medium-term objective. We still have some time, but we need to get a plan in place as soon as we can.”

Bernanke agreed with Djou that one possible solution to expanding the economy is boosting free trade.

“I have been frustrated and disappointed that there have been a number of free trade agreements languishing in Congress,” Djou said. “Do you believe that were the Congress to pass free trade or expansion of free trade, it would help the economy?

Bernanke: “Yes I do. I think we need to be part of the globalized economy, I think trade is an important source of demand for our goods and also a source of materials and imports as well. So I think that generally speaking, you ought to push forward on the DOHA round and on the free trade agreements that we’re looking at.”

RELATED LINKS

http://www.youtube.com/watch?v=VjYd_D0Ejlg

Malia Zimmerman is editor of Hawaii Reporter.

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