Bernanke to Dems: Congress endangers recovery by not finishing its work

Federal Reserve Chairman Ben Bernanke warned Senate Democrats Thursday that Congress could derail the national economy if it fails to complete work on important tax and spending issues by year’s end.

Taxes will increase by an estimated $5 trillion over the next decade if Congress does not extend expiring law by Dec. 31. The nation also faces an automatic $1.2 trillion spending cut and the expiration of the payroll tax holiday and benefits for the unemployed.

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Bernanke warned Democrats at a lunch meeting that the combined effect would have severely damaging consequences for the recovering economy.

“He stressed if all these things occur, it could drive us back into a worse recession and the sooner we can resolve these issues, the more likely we are to give confidence to consumers and investors across America,” said Senate Democratic Whip Dick Durbin (D-Ill.).

Senate Budget Committee Chairman Kent Conrad (D-N.D.) said Bernanke and his colleagues discussed a “fiscal cliff” that could put the country back into recession.

“Talking about the fiscal cliff at the end of this year, with all the tax cuts expiring, with [the spending] sequester, with unemployment insurance expiring and payroll tax cut expiring and if all those things happened that would constitute a fiscal cliff and that would have economic consequences,” said Conrad.

Conrad said colleagues also discussed “the longer-term need to get back on a more fiscal footing” but he said the priority in the immediate term is “avoiding the fiscal cliff.”

“Everybody understands that fiscal cliff could really jeopardize the recovery,” he said.

Congress is not expected to tackle the expiring Bush tax rates, the expiring payroll tax cut or looming automatic spending cuts until after the election. That gives Congress less than two months during a lame-duck session to address these major policy challenges on which the parties disagree bitterly.

One likely scenario is that Congress passes a short-term extension of the expiring law to give lawmakers more time to work on it in the 113th Congress. But given this Congress’s history of brinksmanship, it’s possible a solution could be pushed until the last minute or some of the tax rates may expire.

“Most analysts have said if all those things were not dealt with, all those things that are set to happen actually occurred and nothing were done for an extended period, like a year, that economic growth would disappear,” said Conrad.