Bernanke’s Real Message About Budget Deficits

Has Ben Bernanke suddenly become a deficit hawk? In remarks to the House Budget Committee he sounded like one — calling on Congress to come up with a plan to restore fiscal balance over the long term. “Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth.” This from a Fed Chair who’s loosened the money supply more than any Fed chair in recent history, printing money as if it were going out of style. What’s going on?

Begin with the fact that Bernanke is working more closely with the Treasury any Fed chair since the Second World War. It’s doubtful that Bernanke would make a statement like this without it being at least tacitly approved by the White House. Second, Bernanke and the Treasury know that investors are getting antsy about inflation down the road; yields on long-term bonds are increasing. Third, the White House is having trouble getting Congress to come up with some $600 billion it needs to finance universal health care.

My guess is Bernanke is trying to reassure investors he won’t let inflation get out of control in coming years. If he has to, when the economy is safely out of the morass, he’ll crank up short-term interest rates and squeeze the money supply.

But Bernanke also wants to deliver a message to Congress, a message the White House doesn’t want to deliver because it’s politically awkward: Congress will have to raise taxes on the wealthy in order to finance universal health care and reduce looming budget deficits. Such tax increases won’t slow down the economy because the wealthy don’t spend that much anyway (that’s what it means to be wealthy — you’ve already got most of what you need), but may be necessary, at least to ward off inflation fears.

What sort of higher taxes on the wealthy? Bernanke didn’t say, of course, but the White House has already floated limits on deductions and seems willing to consider taxing employee-provided health benefits for employees over a certain income. And maybe lifting the cap on Social Security payroll taxes, at least for workers earning over $250,000 a year.

About Robert Reich 545 Articles

Robert Reich is the nation's 22nd Secretary of Labor and a professor at the University of California at Berkeley.

He has served as labor secretary in the Clinton administration, as an assistant to the solicitor general in the Ford administration and as head of the Federal Trade Commission's policy planning staff during the Carter administration.

He has written eleven books, including The Work of Nations, which has been translated into 22 languages; the best-sellers The Future of Success and Locked in the Cabinet, and his most recent book, Supercapitalism. His articles have appeared in the New Yorker, Atlantic Monthly, New York Times, Washington Post, and Wall Street Journal. Mr. Reich is co-founding editor of The American Prospect magazine. His weekly commentaries on public radio’s "Marketplace" are heard by nearly five million people.

In 2003, Mr. Reich was awarded the prestigious Vaclev Havel Foundation Prize, by the former Czech president, for his pioneering work in economic and social thought. In 2005, his play, Public Exposure, broke box office records at its world premiere on Cape Cod.

Mr. Reich has been a member of the faculties of Harvard’s John F. Kennedy School of Government and of Brandeis University. He received his B.A. from Dartmouth College, his M.A. from Oxford University, where he was a Rhodes Scholar, and his J.D. from Yale Law School.

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