Fiscal Cliffs and Policy Mixes
I've got a bunch of posts coming this week on Bloomberg View. Here's the first, about why the fiscal cliff is a problem only because of inappropriate monetary-fiscal policy mix, and my thoughts about what is to be done:
Federal Reserve Chairman Ben S. Bernanke, taking questions during a February House hearing on monetary policy, uttered two very special words: fiscal cliff.
“Under current law, on January 1, 2013,” Bernanke said, “there's going to be a massive fiscal cliff of large spending cuts and tax increases.”
It was the first time the phrase had been used, but the idea behind it was far from news. Well before Bernanke testified, the Bush-era tax cuts and the recovery stimulus were scheduled to sunset, and the sequester was set to take effect. Nor was Bernanke's coinage particularly apt, as it likened an accumulation of fiscal policy decisions to a geological phenomenon, a gradual austerity to a sudden apocalyptic plummet.
Still, it stuck. The vivid imagery and false urgency of the term transformed budget arcana into a national Wile E. Coyote moment. The words lent themselves to media overexposure and political opportunism. Despite efforts by Chris Hayes, Ezra Klein and Suzy Khimm to rebrand it the “fiscal curb” or “austerity crisis” -- either of which would be more consistent with reality -- Bernanke's original phrasing has held fast. (Disclosure: I am also a writer for Klein's Wonkbook newsletter.)
Whatever Bernanke's intention in February, Congress now works in fear of falling off his fiscal cliff. The irony is that while economic recovery rests largely in Bernanke's hands, the tyranny of impending austerity is leading Congress toward poor decisions about the long-term structure of public spending and tax policy. These are mistakes monetary policy could never offset.
The cause of our cliff problem rests in the commingling of responsibility between fiscal and monetary policy in managing the economic recovery. A more mature way of doing business would charge the Fed with stabilizing demand in the short run and Congress with a structural environment conducive to the social welfare and economic growth over the long run. The U.S. is doing neither well right now...