Have you heard the one about the big-name financial services CEOs who last week released a letter to Congress and the president demanding they do whatever it takes to avoid the fiscal cliff?
I have no doubt the CEOs were sincere: The fiscal cliff is terrible policy and a ridiculous situation that should be avoided.
But the CEOs’ letter attempts to have it both ways. It demands that the cliff be prevented without the bank and insurance company leaders ever admitting that what they’re really lobbying for is a higher federal budget deficit next year.
We have Federal Reserve Chairman Ben Bernanke to thank for this.
I am not a Bernanke hater. To the contrary: I’m a big fan who applauds the job he’s done and thinks most of the criticism he and the Federal Reserve have received in recent years has been either overwrought hand-wringing or politically motivated tripe.
However, my appreciation for Bernanke doesn’t stop me from fervently wishing he hadn’t been so circumspect when he introduced the phrase “fiscal cliff” to the world last year. Ever since, the actual meaning of what Bernanke was saying either has gotten lost in the translation from Fedspeak to English, or, as happened with the CEOs’ letter last week, the phrase has allowed those who have used it not to say what they are really supporting.
Bernanke used “fiscal cliff” to talk about the combination of tax increases and spending cuts that, if they go into effect Jan. 1 and 2 as required by current law, will reduce the federal deficit by about $500 billion from fiscal 2012 to fiscal 2013. That would come at a time when the other components of the gross domestic product are not expected to be growing fast enough to offset the effect of the reduction in economic activity. As a result, as the Congressional Budget Office and others have forecast, the U.S. economy will fall back into a recession.
The literal translation of what Bernanke said when he first talked about the fiscal cliff is as follows: Congress and the president should take action to increase the deficit.
Using fiscal cliff instead of “increase the deficit” was brilliant short-term politics and communications for the Fed. In the world that exists today on Capitol Hill, Bernanke talking directly about the need for a higher deficit would have provided many in Congress with a too-easy target and made the Fed appear to be out of touch with the times.
This was especially the case because the Fed was already under attack from some for not fulfilling its regulatory responsibilities in the years before the financial crisis, from others for using unprecedented monetary policy tools and by still others who think improving the economy when they are not in power is none of the Fed’s business.
Directly supporting a higher deficit would likely have tipped the political scales against the Fed and overwhelmed the efforts it has been making the past few years to communicate directly with the American people.