Federal Reserve Chairman Ben Bernanke testified today before the House Budget Committee. Afterwards there was some grilling as to the real size of the federal budget deficit. Also discussed in casual passing were the fishy accounting practices galvanized to reduce said deficit — raiding social security and Medicare, for example. The kind of fraud that if committed in the private sector would net the perp serious jail time.
More crucially, Bernanke had some dire economic forecasts about “the evolution of national debt” and the “high rates of government borrowing.” As libertarian writers never tire of reminding their readers, the national debt and government borrowing will “drain funds away from private capital formation and thus slow the growth of real incomes and living standards over time. i the necessity of paying interest on the foreign-held debt would leave a smaller portion of -ur nation’s future output available for domestic consumption. Moreover, uncertainty about the ultimate resolution of the fiscal imbalances would reduce the confidence of consumers, businesses, and investors in the U.S. economy, with adverse implications for investment and growth.”
If current trends in government spending continue, the forecast for the proverbial children caring conservatives and Democrats so love to invoke is particularly grim. Said Bernanke:
According to the CBO projection that I have been discussing, interest payments on the government’s debt will reach 4-1/2% of GDP in 2030, nearly three times their current size relative to national output. Under this scenario, the ratio of federal debt held by the public to GDP would climb from 37% currently to roughly 100% in 2030 and would continue to grow exponentially after that. The only time in U.S. history that the debt-to-GDP ratio has been in the neighborhood of 100% was during World War II. People at that time understood the situation to be temporary and expected deficits and the debt-to-GDP ratio to fall rapidly after the war, as in fact they did. In contrast, under the scenario I have been discussing, the debt-to-GDP ratio would rise far into the future at an accelerating rate. Ultimately, this expansion of debt would spark a fiscal crisis, which could be addressed only by very sharp spending cuts or tax increases, or both.