Monetary Policy

Ten Years Ago: Greenspan Sees Federal Debt Paid Off By End of Decade. Today: Bernanke Doesn't Know What a Dollar Is.

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It was the seventies. You can't judge!

Calculated Risk takes pity on Ben Bernanke by dusting off his predecessor's testimony to the House Committee on Financial Services, dated March 2, 2001.

Ten years ago, Objectivist-trained Fed Chairman Alan Greenspan dazzled us with visions of an $800 billion surplus in 2010, surpluses through 2030, and more:

The most recent projections from OMB and CBO indicate that, if current policies remain in place, the total unified surplus will reach about $800 billion in fiscal year 2010, including an on-budget surplus of almost $500 billion. Moreover, the admittedly quite uncertain long-term budget exercises released by the CBO last October maintain an implicit on-budget surplus under baseline assumptions well past 2030 despite the budgetary pressures from the aging of the baby-boom generation, especially on the major health programs.

These most recent projections, granted their tentativeness, nonetheless make clear that the highly desirable goal of paying off the federal debt is in reach and, indeed, would occur well before the end of the decade under baseline assumptions.

One thing Greenspan did get right:

With today's euphoria surrounding the surpluses, it is not difficult to imagine the hard-earned fiscal restraint developed in recent years rapidly dissipating.

When asked by Rep. Ron Paul (R-Texas) to define the word "dollar," Bernanke today said a buck is an equivalent of "food, and gasoline, and clothes and all the other things that are in the consumer basket."

If Bernanke here is speaking as the Fed Chairman rather than as a wooly professor of economics, his answer is untrue. When calculating inflation, the Fed uses "PCE" or "personal consumption expenditures" rather than the "CPI" or "consumer price index" used by the Bureau of Labor Statistics. As the Federal Reserve Bank of St. Louis indicates here, PCE actually leaves out food and energy costs. So if Bernanke believes food and gas (prices for both of which are increasing sharply, you may have noticed) should be factored into the maintained value of the dollar, he should tell the other folks at the Fed next time there's a Fed barbecue.

Daniel Indiviglio explains why inflation means even the vague definition Bernanke gave would not hold up from one year to the next.