Feb. 8, 2016

What Bernanke Really Meant by ‘Fiscal Cliff’

Alan Greenspan would have been proud of the Ben Bernanke-coined “fiscal cliff.”

That’s exactly the kind of phrase Greenspan would have used when he was chairman of the Federal Reserve — an expression with no pre-existing meaning that makes immediate headlines but doesn’t say anything specific.

That was how Greenspan used to go on record without creating a political headache for himself or for the Fed because, once uttered, the phrase meant different things to different people

Just think about “irrational exuberance,” one of the most infamous of all the Greenspan-created phrases. Greenspan used the phrase to say that investors weren’t reading the tea leaves correctly, that an asset bubble existed, that a big drop in prices was ahead and that a lot of people were going to lose a great deal of money. Saying that directly would have tanked the markets and subjected the chairman and the Fed to serious criticism from Members of Congress and Wall Street. Using the new phrase later allowed Greenspan to say, “I told you so” without actually ever having specified what it was he was telling us about.

This is the reason “fiscal cliff” has been so effective since Bernanke first used it at a hearing of the House Financial Services Committee in February.

It clearly is a warning, but it’s not at all immediately clear what needs to be done to mitigate the impending disaster. Since it was first invoked, fiscal cliff has been used both by those who insist the budget deficit has to be reduced and all of the spending cuts and revenue increases scheduled to go into effect from Dec. 31 to Jan. 2 should be left alone, and also by those who say that now is not the right time to reduce the deficit by that much that fast.

For the record, although the explanation wasn’t reported or repeated as much as the catchphrase itself, Bernanke actually said the fiscal cliff was about the large spending cuts and tax increases already scheduled to occur being far too big for the current U.S. economy to handle at one time. “I hope that Congress will look at [the spending cuts and revenue increases] and figure out ways to achieve the same long-run fiscal improvement without having it all happen at one date,” he told the committee.

In other words, “fiscal cliff” means the big deficit reductions that have been both inadvertently and intentionally scheduled to go into effect at the turn of the year are the absolutely wrong fiscal policy at that time and that the economy will be damaged if they are not changed.

Bernanke was also saying something that he could not say directly: Next year’s federal budget deficit needs to be substantially higher than what it will be if current law isn’t changed.

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