Influence Alley

White House Council of Economic Advisers Chairman Alan Krueger said Thursday that it's the psychological consequences of falling off the fiscal cliff temporarily, not the cash ones, that cause him the greatest concern.

If lawmakers fail to reach agreement to avert the year-end threats of tax hikes and spending cuts known as the fiscal cliff, but do come up with a solution early in the new year to address the sharp fiscal contraction associated with higher taxes and lower spending, the cash flow consequences would not be “all that great,” Krueger said at a luncheon hosted by the Economic Club of Washington. “What’s to me much more worrisome is the psychological effects of falling off of the cliff.”

Those include the perception that the government can’t solve its problems and the uncertainty surrounding the country's fiscal future that might impact household and business behavior. “Those in the short term could be considerably larger than just the cash flow effects,” he said.

Krueger referred to the cliff as a “solvable problem” and repeatedly pointed to President Obama’s budget when asked about specific proposals to reduce the deficit.

The White House and Congress are set to begin discussions on how to avoid the fiscal cliff on Friday.