- The Washington Times - Tuesday, March 1, 2011

Federal Reserve Chairman Ben S. Bernanke sparred with tea party Republicans on Capitol Hill on Tuesday while downplaying the likelihood that soaring oil prices will hurt the economy or cause a surge in inflation.

Addressing the tea party lawmakers’ top priority, Mr. Bernanke recommended against deep spending cuts of $100 billion in programs this year, saying that could harm the recovering economy and that Congress should focus instead on curbing in the next five to 10 years spending on fast-growing entitlement programs such as Medicaid, Medicare and Social Security.

“We don’t have a single-year problem. We have a long-term problem,” he said.

While the fiscally conservative tea party movement has riveted attention on the national debt crossing the $14 trillion threshold this year, Mr. Bernanke told the Senate Banking, Housing and Urban Affairs Committee that the problem will become much worse as the baby boom generation retires and spending on benefit programs escalates.

“The thing to understand is that the long-term imbalances are not just the long-term risk. They are a near and present danger,” he said. “The long-term unsustainability of our debt is a significant problem because it threatens higher interest rates, less confidence, and it could have impact on the current recovery.”

In response to sharp questioning from Sen. Jim DeMint, a tea party favorite, Mr. Bernanke refused to second the South Carolina Republican’s argument that the debt problem can be solved only by drastically downsizing the government without touching the tax code.

He said that economically valuable programs such as education, road construction and research should be sheltered from cuts, although those are some of the areas where Republicans propose their deepest reductions.

The private sector does a better job of allocating resources “in most spheres,” the Fed chairman said, but “there are a few areas where the government plays an important role, like defense for example.”

“I hope there will be an open mind and there will be a discussion of all options, including reforms of the tax code.”

Pressed further by Mr. DeMint to denounce government spending, Mr. Bernanke said that “it sounds like the conclusion of your argument is that taxes should be zero, and I wouldn’t argue that.”

Offering a modicum of support for GOP plans, however, Mr. Bernanke questioned estimates by Goldman Sachs economists that the $100 billion in spending cuts sought by House Republicans this fiscal year would cause a dramatic reduction in economic growth and as many as 700,000 job losses.

“It might have a negative impact,” he said. The Fed estimates it will subtract about 0.7 percentage points from the economic growth rate this year, he said, but the “enormous” losses estimated by the Wall Street firm are too high.

The Fed chairman fiercely defended the central bank against charges from conservatives that it has created an inflation problem by printing money to purchase $600 billion of Treasury debt this year in an effort to lower long-term interest rates.

Since the Fed announced the purchases last summer, global prices of oil, wheat, corn and other commodities that are traded in U.S. dollars have soared, with many legislators and economists questioning whether the Fed’s loose policies might have played a part.

“I see food prices rising. I see gas prices rising, even before what was happening in North Africa,” said Sen. Robert Menendez, New Jersey Democrat.

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