Bernanke Tells Divided Congress to Keep Economy Moving
Business + Economy

Bernanke Tells Divided Congress to Keep Economy Moving

Federal Reserve Chairman Ben Bernanke went to Capitol Hill Wednesday with one overriding message: To keep the economy moving, Congress must develop a plan to address the long-term fiscal issues facing the country. Judging by his reception, however, lawmakers are as divided on that goal as they are on efforts to preserve the economic recovery, extend popular tax breaks and spending, and fund the wars in Iraq and Afghanistan.

Spurred in part by the European debt crisis, the disagreements over debt and taxes that have gridlocked the long-term fiscal debate in Congress have spilled over into these shorter-term policies, creating problems for the Democrats' attempts to govern. "As long as we have the confidence of the markets that we will be able to exit from this situation with a sustainable fiscal program, then I think we'll be okay," Bernanke told the House Budget Committee.

"If the markets take the conclusion from our actions that we're unable to do that, then we face some risk that the interest rates will go up and markets will be unconvinced," he added.

Lately, Democrats have faced internal struggles on several fronts. In the House, they have missed deadlines and pared back legislation to extend unemployment benefits and raise Medicare payments to doctors. In the latest round, Democrats cut out the extension of a health insurance subsidy for the unemployed and higher Medicaid payments to states in order to reduce the bill's overall price tag. Those should all be bread-and-butter Democratic issues, but the cuts were designed to entice wary Democratic moderates and freshmen. The bill passed, but narrowly, as many Democrats defected.

The Senate may now restore some of the cuts, but it's a changed environment from earlier this year, when Sen. Jim Bunning, R-Ky., was subjected to national ridicule for obstructing the same unemployment benefits because of their cost.

"At the moment, the environment here is just to go down one road, and that is deficit reduction," Rep. Rosa DeLauro, D-Conn., complained in an interview with The Fiscal Times.

The Democrats were supposed to finish the legislation, along with another bill providing war funding, before the end of May. As a result of the delay, the unemployment benefits and Medicare provisions expired and would have to be reinstated retroactively. The Pentagon will soon need the war funding; the Senate passed a bill, but the House has postponed consideration of  its version, which includes billions of dollars in domestic spending that cannot make it through the Senate.

Democrats also have yet to produce a budget blueprint for the next fiscal year because of similar disagreements within the party. That measure was due April 15, and without it Congress has not begun consideration of its annual spending bills. "The budget they want to pass is a continuation of the current Obama budget: massive tax increases, unprecedented borrowing," Rep. Paul Ryan, R-Wis.,  told The Fiscal Times, summing up the Republican line of attack. "In the election year they're not sure that they want to vote for all of that."

Ryan also serves on Obama's fiscal commission, which is supposed to make recommendations on long-term fiscal policy by December, but which already seems split between some Republicans who favor tax cuts and changes to entitlement programs, and some Democrats who think taxes should go up and see some entitlements as off-limits.

On Wednesday, Bernanke asked the panel to devise a long-term plan that would contain the deficit. "At some point, you need to address the overall budgetary situation," he said. "If you don't, you'll get a picture … where interest rates are rising. Interest payments are rising because the debt outstanding is growing exponentially. And at that point, things will come apart."

But in this environment, Bernanke's comments became fodder for arguments from all sides, especially since he refused to endorse any specific changes to tax or entitlement policy. DeLauro picked up on Bernanke's comments that greater short-term stimulus could be justified if it also included an "exit strategy" to return to sustainable levels. "[We should] be responsible about the deficit, but you also have to deal with growth in the economy and job creation, because that in fact helps to alleviate deficits," she said. 

Ryan didn't buy that kind of two-track strategy, however. "I don’t think that stuff works," he said. "Borrowing means spending isn't working."