The Benbernank (image: SS&SS)

Before Democrats trotted out their “Republicans are sinking the economy” strategy yesterday, about the only elites willing to tell the truth about the effect of near-term spending cuts were Bill Gross and Ben Bernanke. In his now-regular press conference following the two-day FOMC meetings, Bernanke reiterated himself:

I have advocated that the negotiations about the budget focus on the longer term, say 10 years, which is the budget window, or even longer if you’re taking into blth entitlement reform, for example. By taking a long run aspect we can help the economy by reducing interest rates that may rise suddenly, we may help increase confidence in the households and businesses so ink it’s desirable that we take strong action to lower our budget deficits over the longer term. In doing that I think it would be best not to, in light of the weakness of the recovery, it would be best not to have sudden and sharp fiscal consolidation in the near term.

That doesn’t do so much for the long-run budget situation, it’s a negative for growth … I hope that the congressional negotiators will take a longer-term view.

In economist-speak, this is practically the equivalent of Bernanke doing a Def Jam set. Quit fucking up, is the message.

And it was mirrored by the Congressional Budget Office. People spent so much time looking at the dour long-term budget scenarios (while neglecting the baseline scenario showing that primary balance can be reached simply by doing nothing) that they missed the fact that CBO was pretty clear on the impact of near-term spending cuts:

Before Democrats trotted out their “Republicans are sinking the economy” strategy yesterday, about the only elites willing to tell the truth about the effect of near-term spending cuts were Bill Gross and Ben Bernanke. In his now-regular press conference following the two-day FOMC meetings, Bernanke reiterated himself:

I have advocated that the negotiations about the budget focus on the longer term, say 10 years, which is the budget window, or even longer if you’re taking into blth entitlement reform, for example. By taking a long run aspect we can help the economy by reducing interest rates that may rise suddenly, we may help increase confidence in the households and businesses so ink it’s desirable that we take strong action to lower our budget deficits over the longer term. In doing that I think it would be best not to, in light of the weakness of the recovery, it would be best not to have sudden and sharp fiscal consolidation in the near term.

That doesn’t do so much for the long-run budget situation, it’s a negative for growth … I hope that the congressional negotiators will take a longer-term view.

In economist-speak, this is practically the equivalent of Bernanke doing a Def Jam set. Quit fucking up, is the message.

And it was mirrored by the Congressional Budget Office. People spent so much time looking at the dour long-term budget scenarios (while neglecting the baseline scenario showing that primary balance can be reached simply by doing nothing) that they missed the fact that CBO was pretty clear on the impact of near-term spending cuts:

Lawmakers risk derailing the economic recovery if they act too soon to slash spending or raise taxes substantially. But if they wait too long to tackle the country’s burgeoning debt, they risk damaging the economy for decades […]

Congress’ fiscal watchdog also echoed a message that Federal Reserve Chairman Ben Bernanke has been delivering for months: As tempting as it might be to take a hatchet to the budget ASAP, implementing those changes too quickly could end up worsening, rather than improving the fiscal outlook.

“Making such changes while economic activity and employment remain well below their potential levels would probably slow the economic recovery,” according to the report.

So Democrats are now demanding stimulative measures inside any debt limit deal. Republicans are demanding immediate spending reductions. Only one side is right here; this is not a “shape of the earth; opinions differ!” scenario. The media doesn’t have to treat this objectively. CBO and Ben Bernanke are not hippies. They’ve seen the numbers and they say what any credible economist would say – the confidence fairy is just a fairy, and when you cut demand in a time of depressed demand, it’ll hurt recovery efforts.

But of course, this is merely a ransom, the second half of the tax cut deal. If the 2011 appropriations and the debt limit were folded into that we wouldn’t be having this conversation.

David Dayen

David Dayen