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Tuesday, June 07, 2011

Bernanke: Sharp Fiscal Consolidation Focused on the Very Near Term Could be Self-Defeating

Let's hope Congress listens (many of us have called for this -- a credible deficit reduction plan for the future, but patience, or better yet more stimulus, while the economy recovers). From Bernanke's speech:

Developments in the public sector also help determine the pace of recovery. Here, too, the picture is one of relative weakness. Fiscally constrained state and local governments continue to cut spending and employment. Moreover, the impetus provided to the growth of final demand by federal fiscal policies continues to wane.
The prospect of increasing fiscal drag on the recovery highlights one of the many difficult tradeoffs faced by fiscal policymakers: If the nation is to have a healthy economic future, policymakers urgently need to put the federal government's finances on a sustainable trajectory. But, on the other hand, a sharp fiscal consolidation focused on the very near term could be self-defeating if it were to undercut the still-fragile recovery. The solution to this dilemma, I believe, lies in recognizing that our nation's fiscal problems are inherently long-term in nature. Consequently, the appropriate response is to move quickly to enact a credible, long-term plan for fiscal consolidation. By taking decisions today that lead to fiscal consolidation over a longer horizon, policymakers can avoid a sudden fiscal contraction that could put the recovery at risk. At the same time, establishing a credible plan for reducing future deficits now would not only enhance economic performance in the long run, but could also yield near-term benefits by leading to lower long-term interest rates and increased consumer and business confidence.

    Posted by on Tuesday, June 7, 2011 at 12:51 PM in Budget Deficit, Economics, Fiscal Policy, Monetary Policy | Permalink  Comments (16)


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