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Economist's View: Fed Watch: Fiscal Madness

Tim Duy:

Economist's View: Fed Watch: Fiscal Madness: What is it about fiscal policy that brings out the crazy? Because it all seems pretty simple. Joe Weisenthal hits the nail on the head:

The U.S. recovery has been remarkable on a comparative basis precisely for one reason: Because despite all of the rhetoric, the U.S. has completely avoided the austerity madness that's gripped much of the world.

Weisenthal points us to Ryan Avent and Josh Lehner, both showing in different ways the better post-recession outcomes experienced by the US compared to other economies....

Which brings us to the fiscal cliff (or slope, which is more accurate and avoids creating the false impression that all is lost come January 1). The tax increases and spending cuts in place promise to repeat the mistakes of the UK and the Eurozone by pivoting too fast and too hard into the realm of fiscal austerity....

The proximate cause of Weisenthal's ire is former Federal Reserve Chairman Alan Greenspan, who says:

All of the simple low hanging fruits have been picked and the presumption that we are going to resolve the big issue on spending by making a few little twitches here and there I think is a little naive. If we get out of this with a moderate recession, I would say that the price is very cheap. The presumption that we will solve this problem without paying I think is grossly inappropriate...I think the markets are getting very shaky. And they are getting shaky because I think fiscal policy is out of control. And I think the markets will crater if we run into any evidence that we cannot solve this problem.

As Weisenthal notes, this is a completely backwards analysis. Let's make this clear: If you think fiscal policy is out of control, you should welcome the fiscal cliff. From the CBO:

If markets are shaky, they are shaky because participants recognize the recessionary impact of this level of fiscal austerity and they don't like it. Market participants want Congress and the President to do exactly what Greenspan claims is impossible, minimize the impact of spending cuts.

It is truly time for Greenspan to simply fade away; he no longer has anything useful to add to the discussion. Of anything. Who should join him is Dallas Federal Reserve President Richard Fisher. Fisher laid further claim to the title of "Worst Monetary Policymaker Ever" in a speech last week, first by describing Congress as "parasitic wastrels." It should be obvious that this is not exactly speech conducive to maintaining an independent central bank. He continues with this tirade:

The jig is up. Our fiscal authorities have mortgaged the material assets of our grandchildren to the nth degree. We are at risk of losing our political heritage of reaching across the aisle to work for the common good. In the minds of many, our government’s fiscal misfeasance threatens the world’s respect for America as the beacon of democracy...So my only comment today regarding the recent federal elections is this: Pray that the president and the Congress will at last tackle the fiscal imbroglio they and their predecessors created and only they can undo....

Fisher appears to be under the delusion that the economy is suffering from the effects of large deficits (which require "fiscal authorities to wrestle themselves off the mat"), and the Federal Reserve is the sole support of those deficits. He continues to look at the world as if the US economy was operating well above potential, and that only the Fed stands in the way of 10% interest rates. Of course, if this were true, unemployment would not be near 8%, wage growth would not be scraping the floor, and inflation would not be hovering below the Fed's 2% target. Fisher is not dissuaded by these little facts.... Why are Greenspan and Fisher so horribly wrong? Because they belong to a group that has worried incessantly that large deficits would bring economically ruinous high interest rates and, unless held at bay by the Federal Reserve, runaway inflation. Such worries have been repeatedly proved unfounded, but Greenspan and Fisher have no other intellectual framework to fall back on....

Bottom Line: We need to find a cure for the crazy that some fall into whenever the topic is fiscal policy.