During the five decades before the financial crisis, America had a national debt that, on average, totaled less than 40 percent of one year's gross domestic product, the Fed chairman said. Today the US public debt totals about 75 percent of GDP, with the number increasing if you add in obligations from the Treasury to fund Medicare and Social Security.
Bernanke suggested “replenishing this fiscal capacity,” by gradually reducing the debt-to-GDP ratio. Bernanke cited two reasons for this objective: to promote economic growth and to have a cushion against potential adversity.
Stabilizing the federal debt at the current level is better, of course, than having it continue to rise. And Obama isn’t the only one in Washington who has laid out that goal.
But Bernanke’s words Tuesday are a reminder that, to some degree, the word “stabilize” misses a central question: whether the long-run goal should be to reduce the debt.
The Congressional Budget Office and other forecasters say it’s possible the debt will remain at about 75 percent of GDP a decade from now. But then, judging by forecasts of health-care costs and baby-boomer retirements, they predict the debt will start rising again.
In that context, stabilizing the debt beyond Obama’s one-decade window is very challenging. Bernanke adds that, unless the US can bring its debt-to-GDP ratio down over time, the country will lack flexibility for dealing with potential events such as a war or a new financial crisis.
As Bernanke and prior Fed officials have long done, he refrained from proposing any specific fiscal policies, leaving that to the president and Congress.
But Bernanke echoed many other economists in criticizing the so-called sequester plan that is poised to take effect, under current law, on March 1. He said the sequester amounts to unnecessary economic damage up front, and not enough deficit reduction in the long run.