There’s been a fair bit of buzz about Federal Reserve Chairman Ben Bernanke’s remarks about the need for deficit reduction during his testimony before Congress yesterday.
Many commentators are interpreting Chairman Bernanke’s as bad news for Obamanomics and are arguing that deficit fears will force him to scale back his spending agenda. I disagree.
I suspect Pres. Obama and the Democrats in Congress will use Bernanke’s warning to push for broad tax increases to help reduce the deficit and fund his agenda.
James Pethokoukis explains why we should be worried:
WASHINGTON, June 4 (Reuters) – Sorry, Larry Summers. It’s looking more and more likely that you’re going to be stuck in the West Wing for the duration.
See, if your boss fails to reappoint Ben Bernanke as Federal Reserve chairman come January, it would be a public betrayal worthy of the television reality show “Survivor.” For President Obama has no greater ally: Bernanke is truly the gift that keeps on giving.
The latest evidence came on Wednesday during Bernanke’s testimony before the House Budget Committee. The Fed chairman offered a stern warning about America’s huge budget deficits.
“Maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance,” Bernanke said.
Tough, but hardly atypical Fedspeak.
Then Bernanke went a step further. He gave significant credence to the view that the recent rise in long-term Treasury yields and mortgage rates was caused by deficit jitters: “These increases appear to reflect concerns about large federal deficits but also other causes, including greater optimism about the economic outlook, a reversal of flight-to-quality flows, and technical factors related to the hedging of mortgage holdings.”
Bingo! We have Fed confirmation: those inflation-hating “bond vigilantes” have time warped to 2009 from 1994 and are hot on the hunt for countries that can’t manage their finances.
Now when talk about the return of the bond vigilantes got louder last week, some were quick to declare it bad news for Obamanomics.
Rising rates, the theory goes, could force the White House to trim its future spending plans and return more quickly to a sustainable fiscal path. So long, universal healthcare. Bye-bye, green investments. And Bernanke playing deficit hawk only adds to that momentum, right?
Not really. Chatter about budget deficits and fiscal responsibility is exactly what Team Obama needs right now.
Here’s why: If you buy the theory of bond vigilantism — that credit markets will force interest rates higher in reaction to unsustainable national budget deficits — then you also have believe the White House needs to raise taxes sharply to pay for all its spending programs or risk a bond revolt.
Indeed, plenty of White House staffers, particularly if they worked for Bill Clinton, probably do believe in the theory. It was Clinton, after all, who chucked his investment agenda in favor of a “bond market strategy” to boost growth by persuading credit markets that the administration would balance the books. Read the rest…
Regardless of how you choose to interpret Chairman Bernanke’s remarks the bottom line is the same: Pres. Obama can not pay for his agenda without finding new sources of revenue. He’s going to have to tax rates across a broad swath of Americans, and not just the top 5% as he promised during the campaign. Bernanke’s warning gives him the opening to do just that.
- Our High-Tax, Low-Growth Future – Francis Cianfrocca, Contentions