Bernanke: Don’t play chicken with the fiscal cliff

Leadership in both political parties have spent the last few weeks jockeying for political position on the “fiscal cliff,” AKA Taxmageddon, although perhaps none as blatantly as Senator Patty Murray (D-WA).  The chair of the Democratic Senatorial Campaign Committee threatened to let all of the tax hikes and severe spending cuts go into effect at the end of the year unless Republicans caved on tax hikes for higher-income earners:

Just to be clear, the budget from the Obama administration would have a $900 billion deficit.  Raising the top rate by three points would generate less than $85 billion a year — and that’s using static tax analysis, assuming that income would not get deferred and capital moved outside of the US.  The problem isn’t revenue, it’s spending, and specifically, it’s entitlement spending that got expanded massively by Democrats in 2010 with ObamaCare.

Investors Business Daily ripped the Democrats for playing chicken with Taxmageddon (via Instapundit):

Democrats say they’ll let all the Bush-era tax cuts expire if they can’t raise taxes on the rich. Apparently, economic catastrophe is a reasonable price to pay for class warfare politics.

On Monday, Sen. Patty Murray, who heads the Democratic Senatorial Campaign Committee, said that “unless Republicans end their commitment to protecting the rich above all else, our country is going to have to face the consequences of Republican intransigence.”

What she really means is Democratic intransigence.

After all, Republicans have taken the perfectly reasonable position that the last thing you want to do when the economy is barely breathing is raise taxes.

Obama himself once made that argument, at a time when the economy was doing better than it is today. And a few level-headed Senate Democrats agree.

Yet now, faced with a tough re-election and desperate to score political points, Obama says he’ll veto any bill that extends all the Bush tax cuts, and Democrats, as evidenced by Murray’s comments, are falling in line.

IBD is not alone in its alarm over brinksmanship on the fiscal cliff.  Federal Reserve chair Ben Bernanke issued a warning today to Congress to get the problem fixed — and sooner rather than later:

The economic assessment was much gloomier than Bernanke put forward in his previous semiannual testimony, delivered in February. Then, he told lawmakers that the Fed had seen positive developments in the labor market, an advance in household spending, a rebound in consumer sentiment and gains in manufacturing production. The good news came with caveats, but was on the whole more positive than the assessment the Fed chief put out on Tuesday.

Now, Bernanke says members of the FOMC are even more uncertain about their forecasts than usual, and the risks to growth higher.

The U.S. fiscal situation is one of the primary sources of that risk. Bernanke has warned lawmakers repeatedly that their failure to stop the combination of tax increases and spending cuts that are set to occur at the end of the year, also known as the “fiscal cliff,” will hurt the economy. On Tuesday, he emphasized the tightrope lawmakers must walk.

A Congressional Budget Office estimate that going over the fiscal cliff would cause a shallow recession in 2013 probably doesn’t do the economic damage justice, according to the Fed chairman, because it doesn’t incorporate the effects of public uncertainty surrounding how the matters will be resolved.

In other words, waiting until 2013 will push the economy into a tailspin this year, not next, and probably a harder one than most people think.  Even waiting for the so-called lame duck session after the election might be too late to undo the damage from uncertainty.  Businesses have to make investment plans for next year by September or October, and leaving all the tax hikes in place will force them to scale back on any expansion plans they might have — or even push businesses into contraction, just in case those tax hikes take a huge bite out of consumer demand.  That would almost certainly force Bernanke into taking a ride on the QE3 that investors have assumed the Fed would undertake anyway, which would weaken the dollar further while government takes a bigger bite out of the wallet.

If Murray wants to hold an election defending those outcomes, well, Republicans would probably be fine with it.  I’d guess that Congress cuts a deal that kicks the can down the road another year, though, possibly in September but more likely in mid-November.

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