Although the economy has clearly begun to shake off the effects of the crash, it is only taking small steps forward. Analysts and economists agree that drastic policy changes or interest rate hikes at this point could well trigger another crash, this one worse than before as the fragile economy can not take another hit and bounce back easily. The Federal Reserve Chairman expressed similar views at his address before the Dallas Regional Chamber.
Mr. Bernanke was quick to allay any doubts of imminent tax hikes or government spending cutbacks. He reiterated the need for treading carefully where the economy is concerned as it is still vulnerable and poised delicately on the verge of recovery. However, he also pointed out that the government will face many challenges in the near future, some of which will be unique to the country. With some of the problems having no precedence, policymakers and regulators will have to come up with innovative solutions to stabilize the economy.
A huge percentage of the American population will soon retire from the workforce. While losing expertise or skills is one part of the problem, a much more serious issue is that it will put a massive additional burden on the social security system and the Medicare system. Bernanke pointed out that this could pose one of the biggest challenges for the government.
As payouts begin to rise for sustaining this huge section of the population post retirement, the government will be hard pressed not to resort to the simplest and most effective ways to get the funds – higher taxes. But, at least at this stage, the government is in no position to raise taxes, without seriously threatening the economic recovery. The other alternative would be to make sweeping changes to social security and Medicare benefits – actions that would not be welcomed by the public and could even lead to social unrest, as we recently saw in Greece.
Far reaching policy changes will have to be put in place right now to avert the possibility of any of these options becoming unavoidable, Bernanke warned. These policy changes would also hinge on who comes to power. Republicans strongly oppose high taxes, while democrats are against squeezing benefits. In either case, there are some tough decisions to be made in the next few years.