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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.
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.
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"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), ..."
Yes, but those folks don't need the health benefits you want to tax either. They'll just self-insure and you'll be left taxing the middle class.
If you want tax the wealthy - tax their WEALTH.
June 3, 2009 7:37 PM | Reply | Permalink
Great! Tax the hell out of those rich bastards! It's about time!
We need to be hiking their taxes big time anyway to recover all the tax cut money they drained from the treasury anyway whether health care needs the money or not.
Go for it Congress! Tax em till they are forced to work for a living like the rest of us!
June 3, 2009 7:38 PM | Reply | Permalink
Notice Reich's examples. Those are not taxes on the wealthy. They mainly hit the upper half of the middle class and mostly exempt the very wealthy. I'm all for progressive taxes and increasing taxes for the upper middle class needs to be in the mix too, but that is not the same as taxing the truly wealthy. They seem to have become sacred cows.
June 3, 2009 7:47 PM | Reply | Permalink
Nobody but bond day-traders takes Bernanke seriously.
1) He's not going to tighten the screws when the economy recovers. "Remember 1937" is his motto.
2) The Fed won't be able to reduce the money supply. Ordinarily, the Fed sells its non-cash assets to banks (that drains money from the system). But today, the Fed's assets are predominately junk (MBSs, GSE products, etc.). Nobody's going to buy its junk -- at least not at a price the American taxpayer will accept -- so the money won't be coming home.
Inflation's baked in the cake.
June 3, 2009 7:53 PM | Reply | Permalink
Such tax increases won't slow down the economy because the wealthy don't spend that much anyway
Production, not consumption, is what drives economic growth.
June 3, 2009 8:52 PM | Reply | Permalink
Here come the Austrians. :-)
June 3, 2009 9:14 PM | Reply | Permalink
And more Austrians.
June 3, 2009 9:21 PM | Reply | Permalink
You can never get enough Austrians.
June 3, 2009 9:27 PM | Reply | Permalink
Why Bernanke is right to be worried
June 3, 2009 9:35 PM | Reply | Permalink
Ordinary- link isn't working
June 3, 2009 10:00 PM | Reply | Permalink
Why Bernanke is right to be worried
In case that doesn't work the URL is
http://www.ft.com/cms/s/0/4e9dadca-5057-11de-9530-00144feabdc0.html
June 3, 2009 11:53 PM | Reply | Permalink
I tried the link and it works...but you don't get the full article. The magazine attempts to reserve that for subscribers.
There's a simple trick for getting around that. I won't tell you what it is because that would soon make it worthless. It's enough to know that its possible.
June 4, 2009 12:50 AM | Reply | Permalink
The wealthy are just going to stand around like farm animals while seething mad, insanely jealous oleebs take their money? NOT. Steve Balmer is already warning that Microsoft will shift jobs overseas if Congress attempts increase its taxes.
June 3, 2009 8:58 PM | Reply | Permalink
Oh and this is something new? Besides, corporations really don't pay that much in taxes and they all go for the tax shelters.
Oh and Bluebell, I really don't think that someone making over $250,000 a year is middle class--that seems pretty wealthy to me! Not a billionaire, but could easily be a millionaire.
June 3, 2009 10:10 PM | Reply | Permalink
Oh how terrifying that microsoft might ship jobs overseas! I'm sooooo scared! They and the rest of the corporate rats have been doing that for years. The subject is taxing the rich, not the corporations anyway (although increasing their taxes is also a good idea). We need to return to serious inheritance taxation, we need to significantly raise cpital gains taxes and every other pillar of real wealth. They will still be rich, but they will at least have contributed something to the nation they love to rape.
Jealous? Wrong word pal. Angry and with good cause is more like it. The rich have fucked our country and our people over and it is time, since they took everything else for themselves, to make them take responsibility for their crimes, misdeeds, abuse of power, their corruption, their irresponsibility, their greed and their arrogance. Their threats are hollow and we should not hesitate to make them pay their fair share and frankly, we should write the tax laws so that when they are found to have cheated, there are mandatory prison sentences. If mandatory sentencing is good enough for the common criminal, it's good enough for the rich ones too. I guarantee you they wouldn't cheat on their taxes anymore.
June 4, 2009 1:36 AM | Reply | Permalink
You guarantee me? Boy, there's a worthless promise.
June 4, 2009 1:41 AM | Reply | Permalink
What's worthless is the cowards like yourself who quake in their boots every time one of the rich or a businessman rolls out the same old threats of shipping jobs overseas. Now, go back to being afraid you woos.
June 4, 2009 1:43 AM | Reply | Permalink
Know what? Given what a fraidy cat you are, I think you oughtta run for Congress. You'd make a great Congressional Democrat! You could cave in to the rich just like the rest of em and you'd fit right in right away.
June 4, 2009 1:46 AM | Reply | Permalink
One of the principal causes of our present predicament is the export of jobs. You blame the rich in a most unrestrained way for doing that...but at the same time claim that only cowards fear it.
What an idiot you are!
For everyone else
Paul Krugman Is Wrong on Inflation
Not completely convincing but it shows that a number of very serious people are concerned with our rising debt.
June 4, 2009 2:03 AM | Reply | Permalink
oleeb, how do you do this while avoiding sending people to jail for a long time for making honest mistakes on their taxes?
Also, how do you give the IRS that much power without making it even more subject to misuse y coirrupt politicians? (Oh, you want to write negative articles about my Presidency? Fine, I'll go through your taxes, and if you mad even one mistkae, you'll go to jail for five years! Oh, so now you want to write a puff piece about how nice I am? Good boy!)
June 4, 2009 8:40 AM | Reply | Permalink
Same way we distinguish between involuntary manslaughter and murder. Intent matters.
June 4, 2009 12:30 PM | Reply | Permalink
I have just unfollowed Reich.
Why bother?
June 3, 2009 9:46 PM | Reply | Permalink
Hey Robert? You can drop your writings off here, I guess anyone can, but you don't interact. Why?
June 3, 2009 11:18 PM | Reply | Permalink
On my rare conspiratorial minded days I suspect that the entire Diebold/SCOTUS installed Bush Admin was about ensuring enough time for Asia to take over our high tech jobs like they had our manufacturing jobs.
Then the moneyed elite could safely abandon the first world democratic nations for locales where the natives are not as restless or demanding of services like 'roads', or pesky privileges like 'education' and 'health care' or for that matter 'voting'.
They can finally be free of us and retire to exotic locals like Dubai. When the need for protection arises, they will just hire our taxpayer trained and war-honed former military, who unable to find jobs stateside find high paying 'no questions asked' work as blackwater like mercenaries for hire.
As a final flourish they gave us that great circus with our 'feel good' civil rights first election while raiding the treasury at the very last possible moment and our now quietly transferring their loot into safe assets. While the rest of us, clueless as always, await as the inevitable TARP/TALF/PPP induced inflation begins its slow march towards destroying our county's worth.
As a encore Fox & Friends will blame the comparatively tiny 'stimulus' and all hopes of our progressive goals will die in the flame of an Obama 'Malaise' of hyperinflation.
Ahhh, Galt would be proud!
Okay, I'm off to find my medication. Now was it the blue pill or the red pill I'm supposed to take? Damn it.
Also, I think I have a crush on Ellen.
June 4, 2009 12:02 AM | Reply | Permalink
This is sensible, but incomplete. The numbers don't add up: there is not enough extractable wealth held by the wealthy to fund all of America's needs in health care, social security, defense, and above all in reconfiguring the whole economy for the post-cheap cheap fossil future. It would help, of course, to finally acknowledge that oil, gas, and coal are inherited capital stocks, not income flows, and to price them appropriately. But, one way or another the asinine Bush tax cuts of 2001 are going have to be reversed for the middle class as well as the rich, or else America is headed towards becoming a financial basket case like California.
June 4, 2009 6:13 AM | Reply | Permalink
The "Bush tax cuts of 2001" were countercyclical and appropriate responses to the deflationary trend initiated by the collapse of the T-M-T "bubble." They were intended to keep the money supply expanding.
Whether they unfairly favored the wealthy over the middle class is a matter for argument. There, you'd have to decide what multiplier effect you wanted (tax cuts to the middle class increase the multiplier more than tax cuts to the wealthy).
Remember! Tax policy has nothing to do with paying for government's expenditures. It is ever and always a matter of tuning the economy's money supply.
June 4, 2009 8:10 AM | Reply | Permalink
I wonder if the process is as noble and disinterested as you portray.
I think Paulson abandoned ideology and asked for 700 billion ASAP (no questions, please) following the demise of Lehman because a lot of very wealthy people made it very clear that, unless he rescued them, they were going down and would blame he and Bush.
I think Congressmen and Senators are intervening on behalf of auto dealers because the latter have clout (I can't make much sense of their arguments). It's quite clear that, without government intervention ALL GM and Chrysler dealers would go out of business, and that the Administration is doing a good job of saving as much as can be saved. One can argue that it would have been better to spend the money elsewhere, to have let the entire auto industry enter Chapter 7, but one cannot invoke appeals to the free market at this point (as the dealers are doing).
June 4, 2009 9:48 AM | Reply | Permalink
I was merely taking issue with PTroub's kitchen table, cookie jar economics.
Taxes don't fund government programs; those programs are "funded" -- paid for -- with greenbacks which cost almost nothing to print up.
Once spent by the government those greenbacks increase the money supply and if that increase exceeds the growth of the economy, inflation is the likely outcome.
To prevent inflation the government reduces the money supply by pulling money out of the system (destroying the greenbacks it earlier printed) via taxes.
The question we're left with is whose money should be destroyed.
June 4, 2009 12:23 PM | Reply | Permalink
Somewhat simplistically from the point of view of the individual --
Creditors (the wealthy and retirees) want stable prices (low money supply growth) and thus, opt for low government spending and a reduced multiplier effect (tax the debtors -- that is, take money away from the majority).
Debtors (the rest of the world) want inflation and thus, opt for high government spending and low taxes to keep the money supply expanding (they shouldn't much care whether or not the wealthy pay high taxes just as long as the bulk of taxpayers don't).
June 4, 2009 12:40 PM | Reply | Permalink
A very, very interesting point of view...
...but there's the issue of honesty. Debasing the currency is certainly cheating those who are unaware of the nature of the process.
...and there's the question of accountability. In your view the connection between costs and benefits is broken. Those who pay are not necessarily those who benefit...so how does one judge what is affordable and what is fair?
June 4, 2009 12:57 PM | Reply | Permalink
It does get complicated, doesn't it.
June 4, 2009 2:11 PM | Reply | Permalink
'Don't tax you, don't tax me, tax that fellow behind the tree.'” (Senator Russell B. Long, 1918-2003. [D-La], 1948-87.)
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Glaivester, the American consumer has been driving the world economy for many years.
June 4, 2009 9:12 PM | Reply | Permalink
Robert Reich is a silver fox. Those eyes. He looks like an aged Brad Pitt. rowr
June 5, 2009 12:24 AM | Reply | Permalink