Ben Bernanke on PAYGO

Slogging through the transcript of last week's Senate hearing on the nomination of President Bush's nominee as the new Federal Reserve Board Chairman, we came across an interesting exchange between Sen. Jack Reed (D-Rhode Island) and Bernanke, in which Bernanke tries very hard to avoid implying that his current boss's strategy of unfunded, unaffordable tax cuts is bankrupting the country:

REED: ...do you agree that PAYGO rules should apply to taxes, as well as to expenditures?
BERNANKE: Senator, I think it's important for Congress to have well-developed structures and practices and procedures for managing its budget.But I'm not going to make a recommendation on that. I think that's outside of my realm of authority and I think I would leave that to the Senate and to Congress to make up their own minds.
REED: Well, your predecessor was not equally inhibited. He seems to suggest that PAYGO was an appropriate mechanism to deal with fiscal discipline [...] Let me ask the question again[ ...] If we do not subject tax cuts to PAYGO, then essentially in this economy we're borrowing the money for these tax cuts. Is that accurate?
BERNANKE: It depends on both the spending side and the tax side. To respond to your question in just a general economic way, I think there are several things to look at when you're looking at a fiscal policy. One of them is deficits. Deficits are important because they represent debt which is being accumulated and being passed on to future generations. But the share of the economy being devoted to government spending is another important criterion. In particular, a balanced budget with government spending at 25 percent of GDP is a very different proposition of a balanced budget with government spending at 15 percent of GDP. So I'm a little bit reluctant both for the reasons I mentioned in terms of my prerogatives, but also in terms of the economics, to put specific rules like that. I think that the Congress has to make judgments about the overall arc of the budget and make trade offs.
REED: Well, then let me ask this a final way. Assuming you're consistent in your viewpoint, you would not render an opinion if we increased expenditures without offsetting it?
BERNANKE: I believe that it's within my purview to discuss broad issues of the share of government spending in GDP, the share of taxes in GDP, deficits, fiscal stability, those issues. What I would like to do is refrain from making recommendations on specific matters of taxes and spending, or specific approaches to PAYGO in the similar manner.
REED: And we can assume that's going to be a policy after you're confirmed as chairman?
BERNANKE: That's my intention.

What I think Bernanke is saying here is that PAYGO is a good thing, but is unnecessary when taxes are high. If taxes are (in his example) 25% of GDP, then maybe tax cuts don't have to be offset with spending cuts. But this hardly seems like a reasonable position unless you think that tax cuts pay for themselves. He can't mean that, can he? Read on:

REED: ...Chairman Greenspan has explained as recently as last fall that it's, in his words, "Very rare and very few economists believe that you can cut taxes and you will get the same amount of revenues. When you cut taxes, you gain some revenue back. We don't know exactly what this is, but it's not small, but it's also not 70 percent or anything like that," closed quote. You don't subscribe to the view that tax cuts pay for themselves, do you?
BERNANKE: Senator, the offset, the revenue cost of a tax cut depends on the structure of the tax cut, whether it's one that improves economic growth or not and so on. I think that generally the tax cuts, if they're well-designed, do increase growth and therefore do partially offset the revenue loss. But I think it's unusual for a tax cut to completely offset the revenue loss.

That would be a somewhat-concealed "no," and a pretty poor defense of an admittedly undefendable position: that PAYGO rules don't need to be followed. This topic didn't really reemerge during the hearings, probably because Bernanke has sent a pretty clear vibe that he's not going to pass judgment on the Bush tax cuts as Fed chairman one way or the other. But behind his words is an implicit defense of the Bush administration's fiscal policy that should really have been pursued a bit more.