The Evening Wrap: Mind the Gap
Fingernail-gnawing scientists nudged the hands of the Doomsday Clock ahead this week, citing their growing anxiety over global nuclear tensions. Not to be outdone, Federal Reserve Chairman Ben Bernanke warned that a U.S. economic disaster awaits unless the ticking time bomb of entitlement spending is defused.</br></br>In testimony seemingly designed to grab the new Democratic Congress by the lapels, the top monetary policy maker sounded an unmistakable alarm on fiscal policy, telling the Senate Budget Committee that the recent improvement in the federal budget gap was merely the "calm before the storm." The storm is what a large number of economists expect will be a spine-snapping bounce in federal spending on Social Security and Medicare as the Baby Boom generation enters retirement. Mr. Bernanke told the panel that entitlement spending could shoot to 15% of gross national product by 2030, compared to about 8% of GDP now, and that the problem isn't something that the economy can grow its way out of. Forestalling reform could lead to a ballooning debt, higher interest rates, and a painful retrenchment in the form of sharp spending cuts, tax increases, or both. "The longer we wait, the more severe, the more draconian, the more difficult the objectives are going to be," Mr. Bernanke said, offering that change was past due. "I think the right time to start was about 10 years ago."</br></br>Lawmakers lapped it up. Budget Committee Chairman Kent Conrad, the North Dakota Democrat, said he hoped that "people are listening about the need for us to address these long-term imbalances, to take these challenges on, and the sooner we do so, the better." The highest- ranking Republican on the panel was equally receptive. Mr. Bernanke's warning was "right on, and a clarion call that I hope folks will listen to," said Sen. Judd Gregg. But if legislators seem of one mind on the notion that bulging entitlement payments will some day come along and chop the economy off at the knees, there's very little agreement as to what should be done about it. President Bush tried to overhaul Social Security by instituting private investment accounts, but critics smelled a handout to Wall Street, and the Democrats swatted it down. Treasury Secretary Henry Paulson is exploring options for entitlement reform, however, and Mr. Bush has made it known that he intends to make another run at altering Social Security.</br></br>Some economists, who may have tuned in to the proceedings for hints about the future course of interest rates, said that as dire as the Fed chairman's warning sounded, the "calm before the storm" may have bought Congress and the White House a little bit of breathing room to batten down the hatches. (There was little about rates: Mr. Bernanke, who will offer his semiannual economic testimony next month, called data on December industrial production "good" and discoursed for a little on the merits of various manners of measuring consumer inflation, but that was pretty much the extent of the macro chatter) Brian Bethune of Global Insight wrote that a continuing resolution should keep the clamps on spending, and "has a high likelihood of being extended to the entire fiscal year." But what use politicians might make of that lease is unclear. A battle is brewing over Iraq war funding, and that may blot out all other debate over the pursestrings.</br></br>---