Bernanke sees ‘vicious cycle’ of budget gaps

Federal Reserve Chairman Ben S. Bernanke delivered a stern warning to Congress on Thursday to address the national debt, saying spiraling government spending could lead to a “vicious cycle” of even bigger federal budget deficits.

“The longer we wait, the more severe, the more draconian, the more difficult the objectives are going to be” in responding to the crisis, he said. “The right time to start was about 10 years ago.”

Sen. Kent Conrad (D-N.D.), chairman of the Senate Budget Committee, which called Bernanke in for advice, said Bernanke’s comments were “a clarion call.”

“These long-term imbalances are threatening the long-term stability of the country,” Conrad said.

In part because of increased spending on federal programs, especially Social Security and Medicare, the federal debt equaled 37% of gross domestic product at the end of the last fiscal year and is expected to rise to 100% of GDP by 2030, Bernanke said during the two-hour hearing.

Although the federal budget deficit reached a four-year low of $248 billion last year, Bernanke called it “the calm before the storm” given the growth in federal spending. The Congressional Budget Office is projecting a $286-billion deficit this year; the White House estimates it at $339 billion.

“A vicious cycle may develop in which large deficits lead to rapid growth in debt and interest payments, which in turn adds to subsequent deficits,” Bernanke said.

Federal spending for Social Security, Medicare and Medicaid was 8.5% of GDP last year and was expected to reach 15% by 2030, Bernanke said.

“In the end, the fundamental decision that Congress, the administration and the American people must confront is how large a share of the nation’s economic resources to devote to federal government programs, including transfer programs such as Social Security, Medicare and Medicaid,” he said.

Bernanke offered several suggestions to increase federal revenues and reduce spending, including streamlining the federal tax code to reduce the tax gap between what Americans owe and pay; increasing savings incentive programs; recalculating Social Security benefits; and experimenting with new cost-saving Medicare and Medicaid healthcare programs.

Bernanke declined to comment about interest rates or the state of the economy. Unlike his predecessor, Alan Greenspan, Bernanke resisted taking a position on the merits of tax cuts, beyond observing, “The general view is that tax cuts do not pay for themselves.”

During questioning by Sen. Bernard Sanders (I-Vt.), Bernanke defended free-trade policies such as the North American Free Trade Agreement and trade normalization with China, saying they are not to blame for causing the national trade deficit. Instead, he said, the trade deficit was largely attributable to the historically low national savings rate.

Bernanke is next scheduled to testify before Congress about the economy Feb. 14 and 15. The next Fed interest-rate-setting meeting is Jan. 30 and 31.

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molly.hennessy-fiske@latimes.com