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Bernanke: Health, Aging to Drive Budget

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Federal Reserve Chairman Ben Bernanke today warned the Washington press corps that the United States must do something about health program costs and Social Security or watch the country’s creditors make the adjustments.

Bernanke was talking about the general economic outlook in Washington, at an event organized by the National Press Club.

“I’m especially glad for the opportunity to have a conversation with journalists who write about economic policy from our nation’s capital,” Bernanke said, according to a written version of his remarks provided by the Federal Reserve Board. “Contemporary economic issues can be highly complex, and few nonspecialists have the time or the background to master these issues on their own. BernankeThe public must therefore rely on the diligent reporting, clear thinking, and lucid writing of reporters determined to go beyond dueling bumper stickers and sound bites to help people understand what they need to make good decisions, both in their personal finances and at the polls.”

THE SHORT TERM

The economic recovery that began in mid-2009 seems to be taking hold, despite the slowing caused by the end of stimulus programs and news of Europe’s debt problems, Bernanke said.

Commodity prices are increasing significantly, but job growth and wage growth have been weak, and “overall inflation remains quite low,” Bernanke said.

The Fed is still trying to loosen access to money and promote growth, but “we have developed additional tools that will allow us to drain or immobilize bank reserves as required to facilitate the smooth withdrawal of policy accommodation when conditions warrant,” Bernanke said. “If needed, we could also tighten policy by redeeming or selling securities.”

THE LONG TERM

In the long run, “fiscal policymakers also face significant challenges,” Bernanke said.

The federal budget deficit has expanded to an average of more than 9% of gross domestic product (GDP) over the past 2 years, up from an average of about 2% of GDP during the 3 years prior to the recession.

“Even after economic and financial conditions have returned to normal, the federal budget will remain on an unsustainable path, with the budget gap becoming increasingly large over time, unless the Congress enacts significant changes in fiscal programs,” Bernanke said.

“The two most important driving forces for the federal budget are the aging of the U.S. population and rapidly rising health-care costs.” Bernanke said.

Budget analysts are predicting that the percentage of GDP linked to federal spending on health care programs such as Medicare, Medicaid and the new Affordable Care Act health insurance purchase subsidies will double over the next 25 years, Bernanke said.

“The ability to control health-care costs, while still providing high-quality care to those who need it, will be critical for bringing the federal budget onto a sustainable path,” Bernanke said.

“The retirement of the baby-boom generation will also strain Social Security, as the number of workers paying taxes into the system rises more slowly than the number of people receiving benefits,” Bernanke said.

Federal budget pressures associated with Social Security “are considerably smaller than the pressures associated with federal health programs, but they are still notable,” Bernanke said.

In the real world, U.S. government debt and deficits cannot actually

grow as much as the forecasts suggest, Bernanke said.

“Diminishing investor confidence that deficits will be brought under control would ultimately lead to sharply rising interest rates on government debt and, potentially, to broader financial turmoil,” Bernanke said. “In a vicious circle, high and rising interest rates would cause debt-service payments on the federal debt to grow even faster, causing further increases in the debt-to-GDP ratio and making fiscal adjustment all the more difficult.”

In the long run, “creditors would never be willing to lend to a government with debt, relative to national income, that is rising without limit,” Bernanke said. “One way or the other, fiscal adjustments sufficient to stabilize the federal budget must occur at some point. The question is whether these adjustments will take place through a careful and deliberative process that weighs priorities and gives people adequate time to adjust to changes in government programs or tax policies, or whether the needed fiscal adjustments will be a rapid and painful response to a looming or actual fiscal crisis.”