South-Western College Publishing - Economics  
Fiscal Policy and the Fed
Topic Monetary Policy ; Fiscal Policy
Key Words Monetary Policy, Fiscal Policy, and Entitlement Programs
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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."

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.
  1. True
  2. False
2. Fiscal Policy is aimed at changing the amount of money in the economy to influence economic activity.
  1. True
  2. False
Source Steven Weisman, "Fed Chief Warns That Entitlement Growth Could Harm Economy" The New York Times Online, January 19, 2007.
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