The “Fiscal Cliff” and the Soft Bigotry of Low Expectations

The Congressional Budget Office recently released a report about the looming “fiscal cliff” when a bunch of temporary tax cuts expire and automatic spending cuts come into place. Their conclusion is that said cliff would constitute a large exogenous shock to aggregate demand, sufficient to push the economy back into recession.

Given that the United States government has a special agency—the Federal Reserve Open Market Committee—tasked with stabilizing aggregate demand, you might think that press coverage would focus on the question of what the Fed is planning to do to offset this demand shock. Instead, however, the coverage is myopically focused on the question of what—if anything—the U.S. Congress will do to prevent this from happening. When I wrote about this previously, I think I was too clever by half and just acted as if the Fed would in fact offset this all. Very possibly they won’t.

My point is that if they don’t offset it, they’ve failed to do their jobs.

Congress, after all, already has a lot of jobs. They need to decide if we’re organizing national security correctly. They oversee the federal regulatory framework and federal criminal law. They investigate executive branch wrongdoing. They need to make America’s health care and education systems more cost-effective. They need to worry about social welfare policy and inequality. Most broadly, their legislation helps determine how much of America’s aggregate demand is transformed into real output (and what kind of real output) and how much simply manifests as increases in the price level. That’s a lot of work.

And worst of all, Congress doesn’t have the right tools.

Congress doesn’t have the staff full of economists stabilizing in demand-stabilization. Congress can’t create money. Congress doesn’t set the interest rate on excess bank reserves or control the interest paid by short-term federal debt. Congress doesn’t set the inflation target. Congress handed all those tools over to the Fed. Did so with the idea that the Fed would use them to stabilize demand. But ever since short-term nominal interest rates went to zero, the Fed has been ducking responsibility. The Board members haven’t resigned in disgrace, and they haven’t surrendered their authority to Treasury or the US Congress. Instead they’ve said that AD management is now the complicated interplay of Fed decisions and budget policy, but they haven’t explained what the rules of the game are. And the media, absurdly, is going along with it. When Ben Bernanke warns about the “fiscal cliff” he should get questions about what he plans to do about it. A special committee of AD managers who refuse to accept responsibility for AD management is ridiculous, and it’s made all the more ridiculous by the fact that they won’t surrender their tools. If they don’t think they’re up to the job, they should quit and let David Beckworth or Scott Sumner or someone else willing step up to the plate do it.