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Former Fed Economist Warns of Cliff Jumping Hazards Former Fed Economist Warns of Cliff Jumping Hazards

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Former Fed Economist Warns of Cliff Jumping Hazards

The former chief economist of the Federal Reserve Board has a message for folks who would consider jumping off the fiscal cliff at the end of the year: Don't do it.

David Stockton served as the Fed's chief economist from 1991 to 2011 and he warned of the consequences of allowing automatic tax increases and spending cuts to kick in at the beginning of January

"Going over the fiscal cliff and, in essence, paying the price of a mild recession to put the fiscal situation on a much more favorable long-term path... I think that led some folks to think maybe that's a price worth paying," Stockton said at a luncheon today at the Peterson Institute for Global Economics, where he is now a fellow. "I think that's probably not the right way to think about it, and I think the reason is that going over the fiscal cliff is going to be much more costly than even the [spring Congressional Budget Office's] analysis suggested."

In May, the nonpartisan CBO forecast that growth would contract by 1.3 percent at an annual rate in the first half of 2013 if the cliff went unresolved, pushing the economy into a mild recession. In August, CBO updated its forecasts and said the economy was now more likely to contract by 2.9 percent at an annual rate during that period.

The former Fed economist implored the audience not to be too sanguine about risking a mild recession to reset policy negotiations and put the debt on a more sustainable long-term path. The economy is weak, so the effects of sudden fiscal restraint will be formidable. The financial system itself isn't fully repaired from the recent crisis. And the Federal Reserve, which has already lowered its key interest rate to rock-bottom levels, can do little to soften the fiscal blow of jumping off the cliff, Stockton said. Fed Chairman Ben Bernanke has said as much repeatedly.

Stockton expects sluggish growth of 2.3 percent next year even if a jump off the cliff is avoided.

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