Fiscal Policy and the Fed
Topic
Monetary Policy ; Fiscal Policy
Key
Words
Monetary Policy, Fiscal Policy, and Entitlement Programs
Full
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Reference ID: A157929069
News
Story
In a Senate hearing about when lawmakers should tackle the growth of spending in
Social Security and Medicare, Fed Chairman Bernanke commented that recent
positive trends in the budget were more likely the "calm before the storm." He
further remarked, "I think the right time to start (tackling the problem) is about 10
years ago."
Mr. Bernanke came to the hearing of the Senate Budget Committee citing recent
long term forecasts in entitlement programs by the Congressional Budget Office
that Social Security and Medicare outlays will increase from 8.5 percent of GDP to
about 10.5 percent in 2015 and 15 percent in 2020.
With the goal of the Federal Reserve to promote maximum sustainable output and
employment and to promote stable prices through monetary policy, Mr. Bernanke
has tried to stay away from prognostications on fiscal policy. In fact, before he
took office he told lawmakers that he would not comment on fiscal policy once he
became Fed chairman.
However, like his predecessor Alan Greenspan, he is finding it hard to stay out of
the debate. Mr. Greenspan contented that it would be better to reduce spending
than increase taxes, a position that gave a little insight into his fiscal policy
philosophy. Bernanke did not make such a direct statement about how to conduct
fiscal policy, instead he suggested that it was up to lawmakers to decide what level
of spending on social programs are appropriate, and then set taxes at a level
sufficient to pay for those programs.
Even though he warned of the "calm before the storm," he did manage to refrain
from direct fiscal policy suggestions. "I am going to try to avoid making specific
recommendations on tax policy," he said in response to a question from Senator
Judd Gregg of New Hampshire. In another response, this one to Republican
senator Wayne Allard of Colorado, Mr. Bernanke referred to the cost of
government programs and said, "Whatever it is, you have to pay for it. That's what
I'm saying."
Questions
Discussion Questions:
1. Comment on why you think Mr. Bernanke might be concerned with the
governments fiscal policy even thought his responsibility is with monetary
policy.
2. Social Security and Medicare are referred to as entitlement programs. Use any
source available to define entitlement programs.
Multiple Choice/True False Questions:
1. Entitlement programs like Social Security base a recipient's eligibility on
meeting certain requirements.
a. True
b. False
2. Fiscal Policy is aimed at changing the amount of money in the economy to
influence economic activity.
a. True
b. False
Source
Steven Weisman, "Fed Chief Warns That Entitlement Growth Could Harm Economy" The New
York Times Online, January 19, 2007.