Bernanke’s deficit warning an opening for Obama?

posted at 3:55 pm on June 4, 2009 by Ed Morrissey
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When Ben Bernanke warned Congress yesterday of the dangers in the escalating debt of the US, many took that as a rebuke to both Congress and the White House on their profligate spending.  However, James Pethokoukis sees an opportunity for Barack Obama rather than a warning.  Bernanke’s statements could give Obama sufficient cover to expand tax increases far beyond the limits he originally promised:

Chatter about budget deficits and fiscal responsibility is exactly what Team Obama needs right now. Here’s why: If you buy the theory of bond vigilantism — that credit markets will force interest rates higher in reaction to unsustainable national budget deficits — then you also have believe the White House will need to raise taxes sharply to pay for all its spending programs or risk a revolt. Indeed, plenty of White House folks, particularly if they worked for Bill Clinton, likely do believe in the theory. Recall that it was Clinton who chucked his investment agenda in favor of a “bond market strategy” to boost growth by persuading credit markets that the administration would balance the books. As Clinton nicely boiled it down, “You mean to tell me that the success of the program and my reelection hinges on the Federal Reserve and a bunch of [expletive] bond traders?”

… And today, Bernanke’s sharp warning contributed to that effort. So not only has Bernanke’s unprecedented monetary stimulus allowed Obama to focus on pushing forward his policy agenda rather than a pure stimulus effort (such as a suspension of payroll taxes), but the weight of his authority is now being used to help persuade Americans that the budget deficit is the Next Scary Problem. In short, Bernanke is “preparing the battlespace” for Obama tax initiatives to pay for Obamacare and who knows what else. What more could one Fed chairman do for a Democratic president?

It could also be that Bernanke wants to warn Congress about treading down the path of ObamaCare.  Reuters reported Bernanke’s comments on debt and long-term prospects for economic growth:

“We now are on a process of slow and gradual repair, both in the financial system and the economy,” he said. “We averted, I think, a very, very serious calamity.”

He said financial markets had improved, thanks in part to the Fed’s efforts to restore lending, but he also took note of the recent spike in yields on longer-term Treasury debt and fixed-rate mortgages, which some analysts worry could choke off an economic recovery.

“These increases appear to reflect concerns about large federal deficits but also other causes, including greater optimism about the economic outlook, a reversal of flight-to-quality flows, and technical factors related to the hedging of mortgage holdings,” Bernanke said.

Either way, the warning gives Obama a political opening for the use of the deficit to escalate tax rates across a broad swath of Americans, and not just the upper 5% as he promised during the campaign.  With deficits already projected at staggering levels and a downturn in revenues guaranteed to make them much worse than predicted, the US has to demonstrate that it can pay down the debt and provide return to bondholders without the inflationary device of printing money.  Obama could do that by scaling back federal spending, but he’s not about to do that after using the crisis to get Congressional approval for a wide range of liberal pet projects in the guise of a stimulus package.

Major tax increases will have to come.  The question will be whether Obama can hold off on them until 2011 and still maintain a market for Treasuries at reasonable yields.  He can’t impose the kinds of sweeping tax increases necessary to keep pace with the debt and expect to hold seats in Congress, so this year and 2010 are out.  If, though, Bernanke’s prediction about debt interfering with the recovery proves correct, Obama will have a miserable midterm election regardless.

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