State-level financial crisis burdens US economy - Bernanke

02 August 2010 21:50  [Source: ICIS news]

WASHINGTON (ICIS)--The US economy has stabilised, but huge budget deficits and looming unfunded public pension and healthcare obligations among the 50 states threaten the recovery and hopes for renewed hiring, the nation’s top banker said on Monday.

Ben Bernanke, chairman of the Federal Reserve Board, told a meeting of state legislators that the financial crisis that rocked global economies a year ago was largely over, and the US economy in particular appeared to have stabilised and was expanding again.

However, he added, the recovery was not as robust as might be hoped “and many Americans are still grappling with unemployment, foreclosures and lost savings”.

As in earlier public comments, Bernanke noted that the US housing sector remained weak and poor economic fundamentals and tight credit continued to hamper small businesses, the source of most new jobs creation.

In addition, “the slow recovery in the labour market and the attendant uncertainty bout job prospects are weighing on household confidence and spending”, he said.

That chill on household outlays had been particularly worrisome to economists, because consumer spending accounts for as much as 70% of US commercial activity.

Bernanke cautioned that a full economic recovery for the nation as a whole was also threatened by daunting financial and budget problems confronting state governments.

“With the retirement of state employees that are part of the baby-boom generation and the continued rise in healthcare costs, states’ pension and healthcare obligations will become even more difficult to meet,” he told the legislators.

He was referring to Americans born during the post World War II “baby boom” of 1946-1964. 

The older boomers became eligible for early retirement under most state employee retirement plans at age 62 in 2008, and that first wave of boomers will be eligible for full retirement benefits beginning next year and in 2012.

He said estimates of unfunded pension liabilities among the 50 states run as high as $2,000bn (€1,540bn) as of the end of 2009, and healthcare liabilities for retired state workers could be $600bn.

Those obligations and liabilities could not be adjusted, he noted, because in all but a few cases state pensions and retiree healthcare benefits are locked in by law and, in some instances, state constitutions.

Because they cannot eliminate or reduce those obligations, Bernanke said that state governments frantically cut spending by laying off current employees, delaying or cancelling capital projects - such as new schools and road improvements - and reducing payments to local governments at the county and town levels.

Some states, he said, have raised or tried to raise taxes, “but the weak economy has made it difficult to find significant new revenues”.

Those cuts in state and local government budgets were weighing on the economy, he said, and “state finances will remain under pressure for some time”.

Consequently, Bernanke said, “the demographic and healthcare trends faced by state governments present severe challenges for federal fiscal policymakers as well”.

The US Congress is wrestling with another stimulus proposal that would funnel some $100bn in federal funds to state governments in hopes of saving threatened public sector jobs. Opponents of the measure argued that it would add to the already swollen federal budget deficit and national debt.

As in several earlier speeches about the economy, Bernanke again warned that the federal budget was on an unsustainable path.

“Long-term projections of the federal government’s budget gap under current policies and plausible economic assumptions show a structural budget gap that is both large relative to the size of the economy and increasing over time,” the head of the US central bank warned.

To avoid sudden and disruptive shifts in services and taxes, and to retain the confidence of the public and financial markets, Bernanke said that federal and state policymakers must develop a credible plan to restore fiscal sustainability.

($1 = €0.77)

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