From time to time, Fed Chief Ben Bernanke implores the Congress to take action on fiscal matters. But he has no leverage over the Congress, and although he is a wise economist, he doesn’t have to deal with the political reality that Congressmen have to deal with.
So Congress never listens to him.
But during some testimony this past February, Ben Bernanke dropped a phrase that will end up proving to be one of the most significant things he has ever said, and which is creating a gigantic stir in Congress and the business world.
“Achieving long-run sustainability and providing comfort to the public and the markets that deficits will come under control over a period of time – that’s very important for confidence and for creating more support for the recovery. But at the same time, I think you also have to protect the recovery in the near term. Under current law, on January 1, 2013, there’s going to be a massive fiscal cliff of large spending cuts and tax increases. I hope that Congress will look at that and figure out ways to achieve the same long-run fiscal improvement without having it all happen at one date.”
That phrase, Fiscal Cliff (it’s now achieved proper noun status) has taken on a life of its own.
Businesses blame nervousness associated with it for the collapse we’ve seen recently in the growth rate of Capital Expenditures.
At a recent G20 meeting, global finance chiefs implored the US to address the problem, and prevent the spending cuts and tax hikes from kicking in.
Dealing with the Cliff became topic A the second that Obama won the race, and it became clear the Washington would be divided in exactly the same way it was pre-election.
CNBC has creates a whole ‘Rise Above’ campaign, urging politicians to “rise above” their differences, and stop the fiscal cliff from happening before it’s too late.
The Fiscal Cliff has inspired countless bad graphics showing a car going full-on Thelma & Louise off a cliff.
It’s really hard to imagine Ben Bernanke, back in February, having had any idea how significant that two-word phrase has become.
So now here we are, about a month and a half until the US economy rushes over the cliff to a fiery death, and the basic debate is this: Republicans want to keep current tax rates for everyone. Democrats want taxes to go up in the rich, while keeping them for everyone else. It sounds like a fairly minor disagreement, but given the state of things these days, the two sides may be a canyon apart.
But as the US nears the cliff, there’s been a major pushback by many on the left to rename the cliff.
Ezra Klein at The Washington Post’s Wonkblog wrote a post today titled: We need a new name for the ‘fiscal cliff’.
On the show Up With Chris Hayes, a segment was devoted to why it’s a “fiscal curb’, not a cliff.
So why does the naming matter?
In a piece at New York Magazine, Jonathan Chait explained the problem with the Cliff metaphor.
But here is a case where a bad metaphor has caused everybody to think about the matter in exactly the wrong way. When you walk off a cliff, the first step is your last. There is no such thing as falling halfway down a cliff. But the “fiscal cliff” is not a cliff at all. The economic damage is cumulative. It is the opposite of the debt ceiling, when the doomsday clock ticked down to a moment of sudden calamity. A full year of inaction would do a lot of damage, but a week, a month, or even a couple of months would not.
One can debate how long the US economy can go into 2013 without a deal and not suffer a serious setback, but it’s clear why liberals hate the metaphor.
If the US economy were really going to fall to its fiery death on January 2 without a deal, then the Democrats would morally have to go with whatever proposal came out of the GOP house (the proposal would be some kind of extension [perhaps even permanent?] of all of the Bush tax cuts. Sure, that’s not the liberal policy preference, BUT THE ALTERNATIVE IS FALLING OVER A CLIFF. If these were the only two choices, then it would be insane for Obama not to sign anything to keep that from happening.
But as it is, if Obama and the Democrats can wait it out, and get into January without a deal, then all of the Bush tax cuts expire, and then (theoretically) the tables are turned. Then Obama can “barn-storm” the country, promising to cut taxes on everyone but the rich, and force the GOP into blocking that, on account of protecting the rich. The tables turn completely, but it only works if Washington goes into January without a deal.
If the Fiscal Cliff were just called The Fiscal Slope, then you wouldn’t have the Thelma & Louise imagery, and the Democrats would face much less heat in the media days leading up to January 1.
One reason for the alarmist Fiscal Cliff coverage and rhetoric is the fact that everyone is analogizing it to The Debt Ceiling fight of 2011, which was actually cliff-like in that (per Chait), there was no “halfway down.” If the US had hit the debt ceiling, some kind of catastrophic default was possible. We all saw that nightmare unfold (an event that was followed by a downgrade and a stock market crash), and so the natural thing to think is that this is 2011 all over again.
There are differences, but one similarity is that in both situations, the language worked against the Democratic position.
First the language: In 2011, opponents of raising the debt ceiling were able to make those in favour of it sound like irresponsible yahoos. You want to RAISE the debt ceiling? We’re $16 trillion in debt, and you want to extend your credit limit by $2 trillion more?
Of course, not raising the debt ceiling was the irresponsible move, but because a ceiling on debt just sounds like a good responsible thing to have, 63% (!) of Americans opposed raising it, according to a poll done by CBS. Presumably, if it had been called the Instant Default And Collapse Of The Financial System Trigger it wouldn’t have been so popular. Names matter, and in this case the name worked to the detriment of Democrats.
And now the Fiscal Cliff. Once again, Democrats feel the have some wiggle room for themselves, and don’t feel the need to agree to bad law just so that bad law can be agreed to, and so they’re now the ones risking sending the car into the canyon. Were it called the Fiscal Pothole, it would not be quite the same.
The bottom line is this: Democrats have been itching for years to see the Bush tax cuts (especially the ones given to the rich) go away. They finally feel they have their chance. The economy is just strong enough that a tax hike on incomes above $250k wouldn’t do much damage to the economy. Not only that, but the Democrats benefit from a whole set of policy triggers that are decidedly liberal in nature (not just the tax cuts) but also cuts to defence.
In addition to the liberal policy changes due to come into force, the Democrats just won a solid victory in the general election (Democrats even won more votes for House Members, although the GOP kept its majority due to district configurations). Everything is aligned to finally change the tax code to the Democrats liking.
But in order to do that, the party has to be the one that is willing to go over “The Cliff” at least for a very short time, and that risks the ire of the media and corporate America, which has invested heavily to prevent this from happening.
Bernanke’s little two word phrase is having astounding resonance, and it could create enough pressure to deny the Democrats their goals once again.
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