How to Avoid ‘Fiscal Cliff’: Cut Taxes or Spending?

CNBC.com

In order to avoid the “fiscal cliff” Federal Reserve Chairman Ben Bernanke warned about this week, the debate raged over the best way to fix the economy: Spending cuts, tax cuts or both.

Jared Bernstein, former chief economist to Vice President Joe Biden, stressed increased revenues over spending cuts.

“If you listen to Ben Bernanke — who, I think you have to admit, is not a wild-eyed radical —what he’s saying doesn’t have to do with the overall level government spending level in the long term,” he said Friday on CNBC’s “The Kudlow Report.” “He’s saying next year it would be awfully bad for an economy that’s still finding its legs to cut out about $65 billion … automatically indiscriminately. That’s what the issue is.”

Phil Kerpen, former vice president of Americans for Prosperity and author of “Democracy Denied,” disagreed.

“Those are borrowed dollars, coming from sales of treasuries,” he said, adding that the rest of the world sought safe haven for its cash. “Every dollar we don’t borrow is going to be invested in something more productive in the private sector.

“What we actually see is corporations sit on tons of cash, not investing because of the expectations that taxes are going through the roof.”

Earlier this week, Bernanke warned a Senate panel about the dangers of inaction.

“Uncertainty about the resolution of these fiscal issues could itself undermine business and household confidence,” he said. “Fortunately, avoiding the fiscal cliff and achieving long-term fiscal sustainability are fully compatible and mutually reinforcing objectives.”

In January, the federal government faces automatic spending cuts to the tune of $65 billion, much of it in defense spending.

Kerpen argued that the amount, out of a $4 trillion budget, was practically insignificant.

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“This was a small deal relative to the size of the fiscal challenges we face. If the message is we can’t even stick to our word, that’s a bad message to send about the future course of our fiscal policy in this country,” he said. “Frankly, you cannot solve this problem without significant cuts in spending. We’ve got spending as a percentage of GDP up around 24 percent. The tax system has never borne anywhere near that amount. There have to be spending cuts.”

Bernstein rejected an all-or-nothing approach.

“First of all, nobody is talking about never doing any spending cuts. If you listen to Bernanke, he’s saying, ‘Move that back, push it back,’” he said. “Here’s the thing. We’ve agreed to spending cuts. We need some revenues in the deal as well. We can’t simply do this on the spending side. It has to be much more balanced.”

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