US Fed chief warns of long-term jobless rates, debt crisis

07 January 2011 16:51  [Source: ICIS news]

WASHINGTON (ICIS)--Federal Reserve Board Chairman Ben Bernanke on Friday warned that the US unemployment rate was likely to remain high for several years, that federal deficit spending was unsustainable and mounting national debt would have severe economic consequences if not corrected soon.

In his first major economic outlook of the new year, Bernanke told the Senate Budget Committee that the nation’s modest pace of recovery was continuing and would likely pick up a little speed this year.

However, he said, the slow rebuild in business and consumer spending was “insufficient to reduce the rate of unemployment significantly”.

Earlier on Friday the Department of Labor reported that the US unemployment rate fell to 9.4% in December from the 9.8% rate seen in November, in part because the economy added about 100,000 new jobs in that month.

But the decline of 0.4 percentage point in the jobless rate from November to December was chiefly attributed to the growing number of unemployed who have given up looking for work.  The Labor Department does not count as “unemployed” those who give up looking for a job.

“With output growth likely to be moderate in the next few quarters and employers reportedly still reluctant to add to payrolls, considerable time likely will be required before the unemployment rate has returned to a more normal level”, Bernanke said. Before the recent recession, normal US unemployment rates ranged between 4% and 6%.

Bernanke said that while it was likely that economic growth would pick up this year and that the jobless rate would decline somewhat, “the unemployment rate is expected to be close to 8% two years from now”, or well into 2013.

“At this rate of improvement, it could take four to five more years for the job market to normalise fully,” he added. That means that the nation might not see normal unemployment rates of around 5% until 2016.

If, as projected, the jobless rate remains high, Bernanke added, the recovery could falter.

“Persistently high unemployment, by damping household income and confidence, could threaten the strength and sustainability of the recovery,” he said.

In addition, Bernanke warned Congress that even if the slow recovery continues and the nation reaches a near normal level of commerce and employment, the federal government’s ongoing budget deficits and the growing national debt could collapse the economy.

“The deficit is expected to remain unsustainably elevated even after economic conditions have returned to normal,” he said.

“The [federal] budget outlook is projected to deteriorate even more rapidly, as the aging of the population and continued growth in health spending boost federal outlays on entitlement programmes,” Bernanke said.

“Under this scenario, federal debt held by the public is projected to reach 185% of GDP by 2035, up from about 60% at the end of fiscal year 2010,” he said.

“If government debt and deficits were actually to grow at the pace envisioned in this scenario, the economic and financial effects would be severe,” he warned. 

“Diminishing confidence on the part of investors that deficits will be brought under control would likely lead to sharply rising interest rates on government debt and, potentially, to broader financial turmoil,” he said.

“Moreover, high rates of government borrowing would both drain funds away from private capital formation and increase our foreign indebtedness, with adverse long-run effects on US output, incomes and standards of living.”

“The federal government is on an unsustainable fiscal path,” Bernanke said, “yet, as a nation, we have done little to address this critical threat to our economy.”

“Doing nothing will not be an option indefinitely; the longer we wait to act, the greater the risks and the more wrenching the inevitable changes to the budget will be.”

“By contrast,” he concluded, “the prompt adoption of a credible programme to reduce future deficits would not only enhance economic growth and stability in the long run, but could also yield substantial near-term benefits in terms of lower long-term interest rates and increased consumer and business confidence.”

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