Federal Reserve Board Chairman Ben Bernanke testifies on Capitol Hill,… (J. Scott Applewhite / Associated…)
Federal Reserve ChairmanBen S. Bernanke implored lawmakers last week to keep the federal government from driving off a "fiscal cliff" — a phrase he coined earlier this year to describe the hefty spending cuts and tax increases scheduled to take effect simultaneously in January. But he was talking to the wrong audience. The two men he should have been lobbying are the ones running for president.
Bernanke's remarks came amid a global economic slowdown, with Europe, Asia and China in varying degrees of decline. In the U.S., employment and economic growth have been sluggishsince last year's surge, repeating the up-and-down pattern of the first two years of President Obama's administration. Yet corporate profits have been rising for two years, and companies are sitting on cash hoards worth more than $1.5 trillion. In other words, corporate America has the wherewithal to hire and expand, but not the willingness to put the money at risk.
Democrats and Republicans can't seem to agree on the cause of the problem, let alone the solution, so neither side's proposals are going anywhere. Worse, lawmakers have planted a tax and spending time bomb that's set to go off in 2013. Tax cuts worth about $600 billion annually are slated to expire at the end of this year, and more than $100 billion in spending cuts go into effect on Jan. 1. These changes may reduce the federal deficit, but they're also likely to trigger a new recession, according to the Congressional Budget Office.
The mere existence of such a fiscal cliff may be harming the economy by making consumers and businesses unduly cautious about spending. As Bernanke testified last week, "[U]ncertainty about the resolution of these fiscal issues could itself undermine business and household confidence." Throw in the prospect of another debt-ceiling stalemate on Capitol Hill early next year and it's easy to understand why people would be nervous about what might happen.
We're in this mess because Washington repeatedly put off addressing the government's deficit and debt problems amid the downturn. Even though sudden, across-the-board tax increases and spending cuts would have a disastrous effect on the economy, the longer the government waits to set a course back toward a balanced budget, the harder the problem will be to solve.
Lawmakers recognize that, and some — most notably the "Gang of Six," a bipartisan group of senators that's been pushing a multiyear plan to rein in the deficit — are trying to build consensus for a proposal to overhaul the tax code, slow the growth in Medicare and other costly entitlements, and roll back discretionary spending. That's the right way to address the fiscal cliff, even if it means more deficit spending in the short run.
Unfortunately, the gang's effort has little chance of succeeding in an election year. As long as most Republicans dig in their heels against any increase in taxes and Democrats demand higher rates on "millionaires and billionaires," there's no middle ground. That's why Obama and the presumptive Republican nominee, former Massachusetts Gov. Mitt Romney, should make the fiscal cliff the centerpiece of their campaigns. Rather than a referendum on the past, they should turn the election into a question about the very near future. How, exactly, do they propose to put the federal government's house in order?
They've both talked about overhauling the tax code, but they've offered few details about the winners and losers in their plans. There's a good debate waiting too over how to slow the growth of healthcare entitlements, how large the defense budget should be, and what the size of the federal budget should be relative to the economy. Most important, the candidates need to admit that the fiscal problems can't be solved without sacrifices, and be specific about what those would be.
There's no guarantee that our exceptionally polarized Congress will follow the president's lead next year on this issue, even if lawmakers punt the problem until after the election in search of signals from the electorate. But the more Obama and Romney focus the public's attention on the fiscal cliff, the more likely the winner in November will be able to claim a mandate for how to respond to it.