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Hearing of the House Budget Committee - Near-Term Economic Outlook


Location: Washington, DC


REP. PAUL RYAN (R-WI): Thank you, Mr. Chairman, and thank you for organizing this hearing. It's well timed, and I can't think of a more authoritative witness to discuss the state of the economy than you, Chairman Bernanke, and thank you for coming.

Clearly, the Fed faces a particularly challenging environment right now. Americans have genuine and legitimate concern about the expectations of slower economic growth in the months ahead. Last week, I held 15 listening sessions in my district in Wisconsin. As I would imagine everybody else finds in their districts, the economy was a key topic at every one of these. People are concerned.

Lately, it seems that the Fed has been focused on employment growth as its primary objective. We in Congress are focused on job growth as well, given that we have jurisdiction over fiscal policy. As such, we are all in the midsts of discussing a short-term economic growth package. But the Fed has the sole responsibility for monetary policy, and many would argue, the primary mandate of the Fed is price stability.

Data released yesterday showed that the consumer price index rose more that 4 percent last year, the largest annual increase since 1990. Oil prices have soared, food prices have increased and just this week, the price of gold, which is a traditional hedge against inflation, jumped to a nominal all-time high. Meanwhile, the Fed's softer money policy stance and the prospect of future rate cuts have contributed to a further decline in the dollar, which can raise import prices, further stoking inflation.

My concern is that these interest rate cuts could lead to even more inflation down the road, and history has shown that once inflation pressures are in the pipeline and expectations rise, they can prove costly to deal with. The Fed risks having to put the break on economic growth later on via higher interest rates in order to ring that inflation out of this system.

In your testimony, Chairman Bernanke, you point to the Fed's dual mandate of promoting maximum, sustainable employment and price stability. In this respect, it is appropriate to highlight the balance of risks associated with policy reactions and to make sure that the benefits of any short-term measures are not dwarfed by the cost of our long-term economic health.

Meanwhile, Congress and the administration, Republicans and Democrats, are considering additional responses through fiscal policy. And like you, we face similar risks and trade-offs. And considering our strategy for crafting an economic growth plan, there are several key principles that we need to keep in mind.

First, do no harm. I'm concerned that in our rush to help, we talk ourselves into a quick, feel-good hit today that will leave us a bigger budgetary hangover tomorrow.

The worst thing we can do right now is raise taxes, and we simply cannot spend our way into prosperity. Whatever short-term responses Congress undertakes should aim at reinforcing the prospects of long- term, sustainable growth.

Second, we ought to play to our strength. The strength of our economy lies in its people, its innovation, productivity and resilience, and all flow from sound policies aimed at sustained growth. These policies include a low tax burden and a stable rate of inflation, a resilience on the private sector before the government, an attractive investment climate and a dynamic labor force.

Growth also requires tax certainty, so that American businesses and families can count on the future, and Congress can do something about this. Right now Congress can act to make the current tax laws permanent, thereby providing the largest tax increase in our nation's history. And we can address the AMT early this year, giving middle class families peace of mind that they won't face a much higher tax bill next year. Unfortunately I understand the majority has already taken that particular growth proposal off the table.

And finally we should not add to our entitlement crisis. I'm particularly concerned that Congress may be tempted to use the excuse of fiscal stimulus in the short run. They'll push through new entitlement spending proposals, further worsening the outlook for these programs, building up a spending baseline that worsen our economic future. Expert after expert has warned this committee that our largest entitlement programs, particularly Social Security, Medicare and Medicaid, pose the greatest threat to our nation' future prosperity. And this problem will remain long after the economy works through its near-term problems.

In short, we believe that in addressing the current economic concerns, we've got to keep our focus on good economic policy that lasts beyond the next few quarters, that's consistent with long-term growth. And that is the best recipe for long-term, sustainable economic growth, which ought to be our ultimate goal.

This is a very well-timed hearing. And Mr. Chairman, I appreciate you having this hearing at this time, and I look forward to your testimony, Chairman Bernanke.


Mr. Chairman, I find it interesting that Europe is also facing signs of a slowdown in growth, and feeling the effects of the credit market turmoil. Yet last week, the European Central Bank opted not to lower interest rates, due to its concerns over inflation.


So to try and get an assessment of that specific damage, we're looking at a hundred billion now, possibly more hundreds but not eclipsing the trillion-dollar mark in an economy -- a $14 trillion economy. Is that just the proper way to put this in perspective?


REP. RYAN: On the inflation side of the ledger book, can you give us a good sense of how we ought to measure inflationary expectations? You know, we're using the traditional measurements. We see gold at a nominal all-time high. We see other commodity prices that are post-cyclical indicators showing us possible concerns of inflation. In your testimony, you mentioned that you think you'll see a deceleration of those prices in the second half of this year.

We really haven't had to deal with this since the Volcker era, and so this is new. And the economy's global and different than it was during that Volcker era. What does the Fed look at to try and measure inflationary expectations? Because if those expectations come into the economy, then we have a real problem on our hands, and I'm assuming you would have to have a tightening regime to follow. So what is that the Fed looks at to measure expectations in this new global economy we have?


REP. RYAN: Yeah, I think the concern is that it will happen so fast before it -- you know, after it's too late to do anything about it. So I guess the final question is -- I want to be sensitive to other members' time; I know you have a hard leave time -- is, do you believe that your indicators, these tools you use to measure expectations, give you enough lead time to get the policy adjustments necessary to prevent inflation?


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