Bernanke Speaks! (On Housing, Energy, Entitlements)

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Since chatting up Fed policy with CNBC anchor Maria Bartiromo at a dinner in April–sending stocks plunging–Federal Reserve Chairman Ben Bernanke has kept his public utterances formal. But speaking at the Economic Club of Washington today, Bernanke did take some audience questions after his prepared remarks on America's entitlement problems.

Here are the highlights: Asked about the ever more apparent housing downturn, Bernanke said the sector was undergoing a "substantial correction." In particular, weakness in residential housing construction would probably shave a full percentage point off GDP in the second half of this year and into 2007. Yet Bernanke also pointed out some "strong underpinnings" for housing such as good job growth, strong income growth, and demographics. (The U.S. population continues to grow, of course.)

Beyond housing, Bernanke said the other parts of the economy "remain relatively strong" and nonresidential real-estate investment remains "quite strong," though it was too soon to fully tell how the housing slowdown would affect consumer spending. Asked about short-term and long-term challenges for the U.S. economy, Bernanke said that he "remains concerned about inflation" and that the rate of increase is still above "price stability." He also warned that energy prices could go back up as easily as they have dropped in recent weeks.

As for the economic long run, Bernanke mentioned dealing with Social Security and Medicare and the need to improve the nation's education system to make U.S. workers more productive. He also confidently said that America's future energy problems will be solved through "innovation and the marketplace." So count Bernanke as a nonbeliever in the theory that peaking oil production is going to send America hurtling back into its low-energy agrarian past.

As for entitlements, Bernanke recounted the usual list of problems facing Social Security and Medicare because of the aging U.S. population.

He did, though, specifically reject the idea of letting future generations worry about paying the tab for baby boomer profligacy. Some economists have suggested doing just that because future generations will most likely be richer than today's Americans. Thus, a bigger tax bite won't hurt so much. It's akin to a theory of parents' having their kids take out loans to pay for their college education since the children will be richer than Mom and Dad and have more time to pay off the loans.

Bernanke said such an approach would violate "intergenerational fairness" and also be economically damaging because higher tax rates would have an "adverse effect on a wide range of economic incentives, including incentives to work and save, which would hamper economic performance."