Again from Bloomberg:
Bernanke in a February House hearing:
“Under current law, on January 1, 2013,” Bernanke said, “there’s going to be a massive fiscal cliff of large spending cuts and tax increases.”
The vivid imagery and false urgency of the term transformed budget arcana into a national Wile E. Coyote moment. The words lent themselves to media overexposure and political opportunism. Despite efforts by Chris Hayes, Ezra Klein and Suzy Khimm to rebrand it the “fiscal curb” or “austerity crisis” — either of which would be more consistent with reality — Bernanke’s original phrasing has held fast.[…]
The irony is that while economic recovery rests largely in Bernanke’s hands, the tyranny of impending austerity is leading Congress toward poor decisions about the long-term structure of public spending and tax policy. These are mistakes monetary policy could never offset.[…]
If Congress does not act, what is coming is $500 billion in net deficit reduction in the next year — four-fifths in tax hikes, one-fifth in spending cuts — and $7.1 trillion over the next decade. Of that $7.1 trillion, $4.8 trillion would be in increased revenue from higher tax rates on income, estates and payrolls. The other $2.3 trillion is in spending cuts to defense, Medicare and discretionary spending. Though it will not mean immediate disaster, the fiscal cliff would probably result in a recession and the return of 9 percent unemployment, according to a broad consensus of economic forecasts.[…]
A reasonable solution might be a combination of spending cuts and revenue increases which stabilizes both at 18 or 19 percent of gross domestic product. That would be in line with their 50-year historical average. Increases or decreases beyond this level demand larger arguments about the proper size and role of government.