Bernanke Reminds Us of Need for Fiscal Responsibility

In testimony before the House Committee on the Budget on June 9. 2010, Federal Reserve Chairman Ben Bernanke spoke about the state of the economy. Towards the end of his testimony, he stated:

"history makes clear that failure to achieve fiscal sustainability will, over time, sap the nation's economic vitality, reduce our living standards, and greatly increase the risk of economic and financial instability."

While he blamed the current economic crisis for reducing revenues and costs of economic stimulus for much of our current situation, he also noted that other factors are at play and will continue to keep our economy on an "unsustainable path."

"Among the primary forces putting upward pressure on the deficit is the aging of the U.S. population, as the number of persons expected to be working and paying taxes into various programs is rising more slowly than the number of persons projected to receive benefits. Notably, this year about 5 individuals are between the ages of 20 and 64 for each person aged 65 or older. By the time most of the baby boomers have retired in 2030, this ratio is projected to have declined to around 3. In addition, government expenditures on health care for both retirees and non-retirees have continued to rise rapidly as increases in the costs of care have exceeded increases in incomes. To avoid sharp, disruptive shifts in spending programs and tax policies in the future, and to retain the confidence of the public and the markets, we should be planning now how we will meet these looming budgetary challenges."

"Achieving long-term fiscal sustainability will be difficult. But unless we as a nation make a strong commitment to fiscal responsibility, in the longer run, we will have neither financial stability nor healthy economic growth."

That is all good advice, but what does it mean to make a "strong commitment to fiscal responsibility?"

My reading of the news and the reality of members of Congress bragging about the tremendous tax cuts they have enacted (without also reminding us of the negative effect on the deficit and debt) leads me to think that it will be hard for anyone in office to have a strong commitment to fiscal responsibility. People expect more and continued tax cuts - even of temporary tax cuts. And I don't read about anyone saying they want less government services or a smaller Social Security check or Medicare benefits.

People want tax cuts and continuation of temporary tax breaks AND it looks like the President and Congress want to provide them.

A Tax Notes article of May 3, 2010 (Letter to the Editor from two CPAs - Mary Anne Reilly and Martin B. Solomon) notes that more people seem to be paying less in taxes. They note an example of a hypothetical family of 5 in 2009 with earnings of $100,000 and tax deductions and credits that result in $0 income tax! This is a sign that something is wrong. A family with $100K of wages and no enormous casualty loss or medical expense, should pay something in income tax.

I'd like to see Congress enact a law that each federal government website must have financial data on it regarding revenues, expenses (in various categories) and the size of the debt. We should have better Paygo that really requires all tax cuts to be paid for. Congress should enact tax gap measures that help reduce the largest contributors to the tax gap. Congress should phase out unnecessary tax breaks such as interest deduction on a second home and on home equity debt, tax-free rental income on short-term residence rentals, reduce the exclusion for employer-provided health care and continue to look at others.

As I've noted before - we'll need some "tough love" from elected officials to help them enact the measures needed to exercise a strong commitment to fiscal responsibility.

What do you suggest?