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The Fed and the Cliff



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Over at The Atlantic, David Beckworth and I dispute the Keynesian story about going over the fiscal cliff.

 

The economic stakes from the fiscal cliff debate aren’t quite as high as you’ve been hearing. One largely unexamined assumption of the debate is that going over the cliff–that is, allowing the Bush tax cuts to expire on schedule and letting spending cuts Congress previously legislated take place–will push us into another recession in 2013.

It’s a familiar Keynesian argument. . . .

And it’s one, as we go on to explain, that ignores the ability of the Federal Reserve to counteract any fiscal-policy shocks.



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