BEYOND THE NUMBERS
The Right Approach to Reducing Deficits
As you well know, the nation is on an unsustainable fiscal course, and substantial changes in policy will be needed to right the ship. As a number of bipartisan commissions have recommended over the past year, policymakers should aim to stabilize the debt as a share of the economy (the Gross Domestic Product) so that the debt does not rise relentlessly as a share of the economy. Stabilizing the debt would put the nation on what economists define as a sustainable budget path. To stabilize the debt, budget deficits will need to be reduced to no more than about 3 percent of GDP.
Policymakers should meet this goal in a reasonable period of time. But it isn’t necessary — or desirable — to meet it in the next few years. As Federal Reserve Chairman Bernanke noted last week, it would be unwise to put strong austerity measures into effect right away, while the economy is still growing too slowly to bring unemployment down to more normal levels. Putting substantial deficit-reduction measures into effect now would risk the loss of hundreds of thousands of jobs over the next year or two by slowing the already inadequate rate of economic growth. What policymakers really should do is to act in the weeks or months ahead to enact both temporary measures to strengthen the flagging recovery now and broader legislation that begins to take effect once the economy is stronger (probably in fiscal year 2013) and puts us on track to stabilize the debt as a share of GDP by the end of this decade. Doing so would involve tough choices, both substantively and politically, but would represent a huge accomplishment and allay fears in financial markets. As Chairman Bernanke cautioned, however, reducing the deficit more precipitously is neither necessary nor sound as policy.Click here for the full testimony.