Federal Reserve Chairman Ben Bernanke should win a prize for the tone of his recent remarks to Congress. For telling both representatives and senators that the country was approaching a "massive fiscal cliff," he surely deserves the melodrama-in-everyday-life award. But if Bernanke chose unusually dramatic language to make his point, he had one nonetheless, and maybe the shock value was worth it.
His remarkable phrase refers specifically to the economic danger of the fiscal restraint already scheduled to take effect on Jan. 1, 2013. A sudden cut in spending and a sudden rise in taxes, as will occur in 2013, when the Bush tax cuts are set to expire, could cripple an already subpar recovery and inadvertently compound budget problems. More significant, however, is the chairman's implicit reminder in these remarks that for all the need to control deficits and the budget, policy makers must also consider how tax and spending decisions impact the economy, immediately and over the long run. Deficits and budget reform are more complex matters than many on both sides of Washington's political divide seem to believe. His remark also served as a reminder to politicians, and, through them, to the public generally, that there is only so much the Fed can do.
Basically Bernanke's comments referenced a fundamental aspect of public finance. However much politicians like to draw parallels to corporate or personal finances, the federal budget is fundamentally unlike them. What is prudent and sane for companies and individuals can be very dangerous for governments. With a company or a household, red ink demands an immediate cut in outlays and efforts to increase income. A firm produces more goods and prices for sale, while at the same time searches for ways to cut costs. Every success on either side of this equation addresses the deficit problem. Household members work longer hours and spend less on themselves to the same effect. But for governments, spending cuts, if done bluntly or too suddenly, can so hurt certain segments of the population that the resulting economic shortfalls cut into tax revenues and only make deficits worse.
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