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What Bernanke Really Meant by ‘Fiscal Cliff’

This was a Houdini-like escape act. Regardless of whether they make economic and budget sense, reducing the deficit, cutting spending and not raising taxes are politically very popular positions for most Members of Congress, and Bernanke saying no to any of them directly would have brought hell and damnation down on the Fed and its chairman at a time when they already were under a great deal of political pressure from Republicans on Capitol Hill not to get involved in fiscal policy.

Using a Greenspan-like phrase to say these things obliquely meant that Bernanke and the Fed haven’t been in the line of fire when, as happened last week, the true economic damage the fiscal cliff will cause broke out in the public for all to see.

It’s not that there weren’t previous estimates from Wall Street and elsewhere of how much the fiscal cliff would slow economic growth. But it took an extraordinarily un-Greenspan-like (that is, direct and easy to understand) report by the Congressional Budget Office to focus attention on what will happen.

The CBO, which publishes some of the most useful but also least appreciated budget analysis in Washington, said on May 22 that the fiscal cliff will reduce real gross domestic product by 4 percent from fiscal 2012 to 2013 with the economy contracting at an annual rate of 1.3 percent in the first half of the year. The CBO then used a word seldom seen in published federal documents: The two consecutive negative quarters, it said, means the U.S. economy will be back in a “recession.”

The CBO also said stopping the fiscal cliff policies from going into effect means that real GDP will grow in calendar year 2013 by around 4.4 percent, well above the 0.5 percent it projects will happen if there are no changes.

What was Bernanke really saying when he talked about the fiscal cliff? Go back to his statement above and it’s actually not hard to see that his recommendation is that the deficit be reduced by as much as is scheduled to happen during the fiscal cliff but to do so over a much longer period (“the same long-run fiscal improvement”). That will leave the budget deficit much higher than it otherwise would be every year, but it will keep the economy moving forward instead of declining.

No doubt Greenspan will be at least as proud of Bernanke if that happens as he likely was when fiscal cliff was introduced to the political world.

Stan Collender is a partner at Qorvis Communications and founder of the blog Capital Gains and Games. He is also the author of “The Guide to the Federal Budget.”

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