Is America’s Debt Sustainable? U.S. Rep. Charles Djou Questions Federal Reserve Chair

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House Budget Committee Hearing | State of the Economy: View from the Federal Reserve | June 9, 2010
Rep. Charles Djou: Dr. Bernanke, a few very quick questions here. First off, you began your testimony that the economy is showing modest signs of economic growth—I think we’re all happy about that. My question to you is that given the signs of modest economic growth do you believe that there is a need, is it wise to do additional fiscal stimulus to help the economy along, or do you believe that the economy right now does not need further fiscal stimulus on the fiscal side?
Federal Reserve Chairman Ben Bernanke: I’ll turn it back to you this way: 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.

Rep. Djou: And do you, right now, see any exit strategy—fiscal exit strategy—out of the United States Congress?


Bernanke: Well, we have this deficit commission that Mr. Ryan is on, and Mr. Spratt, and I hope that they will come up with some good recommendations, but right now, there’s not anything on the table at this point.
Rep. Djou: Second series of questions, Dr. Bernanke, and that is I have been frustrated and disappointed that there have been a number of free trade agreements languishing in Congress. 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.
Rep. Djou: Finally, Dr. Bernanke, you testified that the ‘federal budget appears to be on an unsustainable path;’ 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?

Bernanke: One simple rule of thumb 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.

Rep. Djou: And to follow up on that, for this coming fiscal year, what number would that be for the budget deficit?

Bernanke: 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 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.

Rep. Djou: So what dollar amount—the budget deficit, two percent of GDP—what dollar amount?
Bernanke: Well right now that would be about $300 million.
Rep. Djou: Thank you. Thank you, Mr. Chairman.