“Fiscal policymakers will have to put the federal budget on a sustainable long-run path that first stabilizes the ratio of federal debt to GDP and … eventually places that ratio on a downward trajectory,” Bernanke said in his prepared testimony.
The distinction between the two goals may seem subtle, and Bernanke didn’t reference Obama or his administration by name, but the difference between Obama’s goal and Bernanke’s is many trillions of dollars over time.
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.