Alice Rivlin offers her comments on the economic situation in the U.S. once a month on PBS'
Nightly Business Report.
Date: 2011 | 2010 | 2009 | 2008 | 2007 | 2006| 2005 | 2004 | 2003 | 2002 | 2001 | 2000 | 1999
2011 Commentaries
2/28/11 - Address the Real Budget Issues
Squabbling over federal spending for the few months left in this fiscal year is a distraction from the serious deficit threats of the future. Threatening a costly, pointless government shutdown is just plain silly. Our elected leaders should turn to next year's budget and start sorting out needed government activities from lower priority ones we can live without. The president has offered cuts in long-standing programs to fund investment in future growth within a constrained total. He and Congress should work together to decide what we most want our government to do as we all tighten our belts. This will take hard work and willingness to compromise, not posturing and sound bites.
Even more important, we must also slow the long-term growth of Medicare and Medicaid and make Social Security solvent. We must reform our absurdly complex, inefficient tax code so it raises more money at lower rates. Otherwise, we face a debt catastrophe that could destroy our prosperity and world influence. These tough decisions must involve both parties working together so that neither side can blame the other for what has to be done.
Brave young people are risking their lives in the name of democracy in far places. Can't we show that our democracy works right here right now?
2010 Commentaries
11/15/10 - Suppose We Just Keep Borrowing
The soaring federal debt was featured in the election, but solutions were scarce. Any serious plan to cut the massive debt build-up requires reining in future federal spending and raising revenues. Both can be done in ways that give us a more productive economy and keep the recovery going. But any balanced proposal for spending cuts and revenue increases runs into a buzz saw of exaggeration-witness the reception of the ideas that Erskine Bowles and Alan Simpson floated last week. The left screams that reducing federal spending growth will hurt the poor, the elderly, and working families. The right shrieks that tax increases will kill investment and enterprise. But if we go on borrowing the difference between the spending the liberals say we can't cut and the taxes the conservatives say we can't raise, we will run out of creditors willing to finance our profligacy. A debt crisis could cause economic devastation for workers and business, young and old, rich and poor. It would be far less risky to cool the exaggerated rhetoric and craft a combination of spending cuts and revenue increases to bring the debt under control. The election is over. It is time to get serious.
09/13/10 - Unrealistic Expectations-Again?
Unrealistic expectations caused this deep recession. People who should have known better believed housing prices would never go down, bad loans packaged in fancy securities would become sound investments, and borrowed money never had to be repaid. But when fantasies evaporated and the economy crashed, common sense did not return. Voters transferred their unrealistic expectations to the government. New political leadership would fix the recession fast, create new jobs for all, restore house values, wipe away credit card debts, and send us back to the malls for another spending spree. It didn't happen. The economy is growing again, but not fast enough. New jobs have been created, but not enough of them. Housing prices have stabilized but are not roaring again. Now angry voters are looking for new faces to embody their unrealistic expectations. But anger is not a strategy. When this orgy of blaming that passes for political campaigning is mercifully over, we still need to rebuild the economy, stabilize the debt, and upgrade skills and infrastructure. We need leaders and followers with patience and common sense to put aside ideology in favor of getting things done. Can we forget the unrealistic expectations and work together or will our fantasies sink us again?
08/2/10 - Markets for Health Insurance
Critics of the new health reform call it the road to socialism. But wait a minute, isn’t the central innovation a new market place, called an exchange, in which the uninsured can buy health insurance? Doesn’t the exchange allow consumers without health coverage to choose among competing private-sector health plans? The law charges States with setting up exchanges, although they can form regional exchanges if they like. Health plans meeting certain standards offer their wares. Consumers, armed with federal subsidies for those with low incomes, make choices. Small businesses can also use exchanges to shop for the best deal in a larger pool. That doesn’t sound like socialism to me. It sounds like a serious effort to make competition and choice work for people and businesses that have been left out of existing markets for a long time. But designing functioning markets is tricky and consumers can’t make intelligent choices without easy-to-understand information. So market enthusiasts had better work hard to set up efficient, customer-friendly exchanges. Health reform is an opportunity to move beyond the rhetoric of market solutions and demonstrate that consumer information, choice and competition can actually improve quality and restrain the rising costs of health care. Let’s not mess it up!
06/14/10 - The Price of Aversion to Power
American’s aversion to concentrated power runs deep. Our Constitution divides authority between Washington and the States and separates the executive, legislative and judicial powers so that they check and balance each other. This dispersion of power has protected our democracy from capture by a dictatorial regime for more than two centuries. But we pay a steep price for our rejection of centralized authority. When the financial system’s implosion devastated the world economy, we discovered that no one was in charge of curbing excessive risk-taking at big financial institutions. Multiple state and federal regulators competed to attract clients to the weakest rules and had no plan for damage control if things went wrong. Now Congress is considering creating yet another body--a council to coordinate the regulators. When the oil-rig explosion wrecked the Gulf Coast, we discovered that no one was enforcing safety rules that might have averted disaster and there was no plan for damage control if the worst happened. Democracy and freedom are not incompatible with strong government authority to protect the public from uncontrolled explosions, whether financial or environmental. Regulators must have clear mandates, adequate resources, and public respect. If we don’t learn this lesson, the next catastrophe will replay the chaos and finger pointing, while people and their livelihoods suffer.
04/05/10 - Protecting the Consumer BorrowerProtecting consumers from predatory lenders need not be complicated. Back when we did housing finance right, long-term fixed rate loans with moderate down payments financed high rates of home ownership. Secondary markets spread risk and brought capital into the housing market. Government agencies could give low-cost guarantees, because most Americans paid on time. But this good record disappeared, as lenders pushed people with questionable credit into loans they were unable to repay--often with no down payments, no proof of income, and teaser rates set to go much higher with penalties for prepayment. Lenders made huge profits feeding a monster that packaged and repackaged low quality mortgages into securities with inflated credit ratings. One obvious lesson of this costly catastrophe is that we need strict rules to protect borrowers from getting in over their heads. Predatory lending does not help low-income families become long-term homeowners—and never was mandated by the unfairly-maligned Community Reinvestment Act. Congress should create a strong, independent consumer protection agency to enforce national rules for mortgage lending, credit cards and other consumer loans. This agency will not need an army of regulators, since its rules should be easy to verify. It should be a stand-alone agency and not have other duties. Protecting borrowers is enough.
2009 Commentaries
07/13/09 - This is the Right Time for Health Reform
With the economy in deep recession and the budget deficit off the charts, should the President postpone his ambitious quest for health reform? Absolutely not: he should push harder to get comprehensive reform enacted now. Millions of workers are losing health coverage along with their jobs and many more fear this will happen to them. Businesses are reducing health coverage and workers with diminished incomes are struggling to pay their doctor bills. How could we have a more dramatic illustration of why we need basic health coverage for everyone that does not depend on the ups and downs of employment?
Currently soaring deficits relate to the recession itself and financial system repair. These deficits will recede as the economy improves, but the long run budget picture remains grim. The best hope for reducing the rate of growth of federal spending in the future is making health care delivery more efficient so that we get more care per dollar. Reducing waste requires investment in information systems, analysis of effective treatments, and new reimbursement systems that favor efficiency. Without comprehensive reform the wastefulness of our current health care system will continue.
Both the recession and concern about future budget deficits argue for accelerating comprehensive health reform, not retreating from it.
I’m Alice Rivlin
04/27/09 - Reviving the Economy: Real Estate The American dream of home ownership for average families is lying in a heap of toxic assets, but it can emerge stronger than ever if we learn the right lessons from the sad history of this decade. Lesson one: housing prices can go down as well as up should be written in huge letters in every lending institution in America. Lesson two: lax lending standards, teaser rates, no-doc loans and other immoral practices are no favor to the borrower and cannot be tolerated. Lesson three: loan originators must keep part of the risk. Their function is to judge the credit worthiness of borrowers. Allowing them to off-load the entire risk of default on someone else invites disaster. We need securitization, but must rewrite the rules. The good news is that many families are already finding housing more affordable than they believed possible. In the future, we need stronger public efforts to ensure the availability of affordable housing, both owned and rented in mixed income neighborhoods. We should experiment with rent- to-own options and create community land trusts that offer opportunities for low-income families to build equity while keeping units affordable. The American dream should be a decent home for everyone, whether owned or rented.
I’m Alice Rivlin
02/2/09 - Healthy Banks and Financial MarketsIt is not fair for millions of wage-earners to lose their jobs and homes because overpaid financial hotshots made stupid mistakes. This crisis was caused by financial innovation gone wild, excessive greed, and inadequate regulation. So why not let the high-flyers slide into oblivion, while the government concentrates on putting people back to work and saving their homes? Unfortunately, it isn’t that simple. The economy can’t function without healthy banks and financial markets. When businesses and individuals can’t get credit, jobs disappear really fast. That is happening as we speak. The huge injection of government capitol into the banks kept the system from imploding and eased credit a little, but we still need to remove toxic assets and restore bank viability, so that credit can flow more normally. More help for the banks doesn’t sound like a job creation program, but unless it succeeds, no economic stimulus will turn the jobs spiral around. The financial hot shots should forget the perks and bonuses and work hard to use the taxpayers’ money to fuel the economic engine. After that we need their clever minds to help figure out how to make the capitalist system less prone to excesses followed by collapses that destroy the livelihoods of average workers.
I’m Alice Rivlin
1/5/09 - Reform Health Care Now!In his campaign Candidate Obama promised to fix the two biggest problems of American health care: making our wasteful, expensive system more efficient; and covering the uninsured. But the new president now finds himself facing the worst recession in decades and some are advising him to put health care on hold until the economy recovers. Nonsense, this is exactly the right moment for comprehensive health reform! The ranks of the uninsured are swelling. Fear of losing health coverage is making consumers anxious and afraid to spend. Part of restoring confidence is assuring workers they will not lose their health insurance even if they lose their jobs. Moreover, slowing the growth of health spending requires substantial investment in the skills, knowledge, and infrastructure needed to make care more efficient—including information technology and analysis of which drugs and treatments are worth the cost and which are not. Well planned investment in a more effective health system is at least as important to economic recovery as investment in transportation and communications. The Great Depression made Social Security possible by dramatizing the plight of the elderly. This recession dramatizes the challenges to our health system. There will never be a better moment to launch comprehensive health care reform.
I’m Alice Rivlin
2008 Commentaries
12/1/08 - The Obama Economic Team’s Assignment
President-elect Obama must have been marvelously persuasive to have recruited the outstanding economic team announced last week. Here’s your first assignment, he must have said: get credit flowing to worthy borrowers, downsize the bloated financial services industry to sustainable size; guarantee responsible financial behavior in the future without stifling innovation; get those dubious assets off balance sheets, and then extricate the government from the banking and finance business lest somebody think we are socialists. Do this without much cost to taxpayers, because they shouldn’t have to pay for the sins of fat cats who made more in a day than they make in a year.
Your second assignment is even more urgent: slow the free fall of the economy, get cash in the pockets of people most hurt by rising unemployment, keep the states afloat, and then create a few million jobs building things we really need—no bridges to nowhere, please. After that, take on the harder stuff. Shift the American economy from over-consumption and excessive borrowing to solid saving and smart investing, while convincing our foreign creditors that we have become competent fiscal managers with a serious plan to control our exploding deficits and debt before they drown us. And—oh, yes,--do it in a collegial bipartisan manner. OK, Team—get started!
I’m Alice Rivlin
09/29/08 - Down with Ideology! Up with Pragmatism!A lasting benefit of the Great Financial Crisis could be replacement of simplistic ideology by sensible pragmatism. In recent years, anyone who advocated modernizing financial regulation to protect the public from fraud and greed was accused of interfering with free markets, endangering the capitalist system, and rushing down the road to socialism. Those who questioned lax lending standards in mortgage markets or suggested that firms and funds and households might be over leveraged were branded enemies of economic growth. The zealots of free market capitalism hooted down those who suggested that innovative financial products, proliferating derivatives, and globalizing markets required rethinking the regulatory structures designed for a simpler world. Their mantra was “less regulation is always better.”
But financial markets got way out of hand and the consequences were catastrophic. Better regulations would have reduced the carnage and saved taxpayers a bundle. The point is not to regulated more, but to regulate smarter. Writing rules to contain the excesses of markets, while preserving their enormous benefits, is tough duty and is never finished. As financial structures evolve, the rules have to be rewritten. Now we can ditch the rhetoric and get on with the difficult job of making capitalism work.
I’m Alice Rivlin
08/18/08 - Convert the Mortgage Interest Deduction to a CreditAs we repair the damage from the bursting housing bubble, we need to focus on how to prevent the next one. Part of the answer should be converting the mortgage interest deduction to a credit. The tax provision that allows homeowners to deduct mortgage interest from their taxable income is the nation’s biggest housing subsidy--a bizarre subsidy whose benefits go differentially to the well-healed. The higher your income, the higher your tax bracket, and the more valuable the mortgage deduction is to you. Do higher income people merit extra help paying for housing? I don’t think so! Along with low interest rates and lax regulation, the mortgage interest deduction fueled the housing bubble, especially the boom in expensive houses, which now glut the market. But don’t we want to favor home-ownership? Certainly, but we have over invested in housing, especially high-end housing, compared with more productive assets. We should take this opportunity to scale back the mortgage interest deduction and convert it to a credit so that taxpayers at all income levels get the same tax benefit per dollar of mortgage interest paid. That’s simple fairness. Moreover, it might encourage more productive investment and mitigate the next housing frenzy.
I’m Alice Rivlin
06/9/08 - Moral HazardWe hear a lot about moral hazard these days. That’s jargon for policies that tempt people to take risks. Libertarians claim that requiring motor cycle helmets poses moral hazard because it invites reckless biking. Free market purists think the Federal Reserve’s rescue of Bear Stearns invites reckless investment banking. Never mind that the shareholders of Bear feel like the biker whose helmet saved him from brain injury, but not from broken legs and a destroyed Harley. The same people are now saying that putting public money at risk to help families facing foreclosure will encourage the reckless at the expense of the prudent.
But society shares the blame for not regulating the lax lending standards and high pressure tactics that led home-seekers to borrow too much. Moreover, foreclosures are a contagious disease—destroying property values even of prudent neighbors. If help is not forthcoming, the foreclosure disease will spread more rapidly and prolong the pain. All public policies involve trade-offs between conflicting values. Policy makers must weigh the benefits of helping distressed homeowners against the risk of encouraging future imprudence. This moral hazard problem is tougher than motor cycle helmets, but I believe that we should mitigate the contagion and buy time to fix the fundamentals that society got wrong.
I’m Alice Rivlin
04/21/08 - The Positive Side of the Housing SlumpIf you think the bursting housing bubble is an unmitigated disaster, think again. A seller's loss is a buyer's gain. Many urban areas with strong housing markets have become unaffordable to ordinary working people. Workers in stores, offices, restaurants, and construction endure exhausting commutes to far suburbs to find an affordable homes. Teachers, police, firefighters, nurses and medical technicians live long distances from the communities they serve, and the skyrocketing price of gas has made their commutes increasingly costly. The housing slump-painful as it is for many current homeowners-will have two positive effects. First, it will slow the sprawl of cities into the far exurbs that adds to congestion, pollution and time on the road. Second, it will make living closer to work more affordable for millions of families. The market will accomplish most of the change without public intervention. But community land trusts also have a chance, with state and federal help, to buy distressed properties at bargain prices. They can fix up homes, save neighborhoods from the blight of vacant and vandalized dwellings, and rent or sell them to low and moderate income workers. This ill wind could blow many families into more convenient, affordable housing.
I’m Alice Rivlin
02/11/08 - What the Candidates are not Saying about the BudgetReading the president’s new budget made me wonder whether the presidential candidates realize how deep a hole they are vying to step into. Even without a recession, the federal deficit will be more than $500 billion by January 2009. President Bush projects a mere $400 billion, but he leaves out the on-going spending needed in Iraq and Afghanistan and assumes totally unrealistic cut-backs in domestic spending. With even a mild recession, the debt increase will mount. The new president’ initiatives will be constrained by the excessive borrowing of the last eight years and the world’s eroding confidence in the dollar.
But by far the toughest budget challenge for the next president is that promises already made under Medicare, Medicaid and Social Security cost more than we can afford. The new administration and congress must take those programs off auto pilot. They must decide what benefits to retain and how to raise the money. Otherwise, their only choices are to endanger the future by slashing funding for research, education and infrastructure, passing impossible debts to future taxpayers, or raising taxes to unprecedented levels that are sure to slow economic growth. When the band stops playing, and the confetti is on the floor, the next president will be walking into an agonizing budget dilemma.
I’m Alice Rivlin
01/28/08 - Why we Need the Stimulus PackageThe best thing about the stimulus package proposed by President Bush and Speaker Pelosi is that they worked it out together. When the Democrats recaptured the Congress in 2006 I hoped that divided government would force the parties to cooperate on difficult problems that cry out for bipartisan compromise—immigration reform and Social Security, for example. Instead, partisan wrangling escalated and constructive compromise vanished.
But the threat of recession focuses the mind. With economic signals turning negative, the Administration and congressional leadership agreed remarkably quickly on tax rebates to boost spending as well as measures to encourage investment and mitigate mortgage foreclosures. I would have preferred including extended unemployment benefits, increases in food stamps, and some relief for the States. But the essence of compromise is that neither side gets everything they want, but stalemate is avoided.
If enacted quickly, this package will boost spending in the summer and fall, and reduce the severity of the economic slowdown. It may avoid the Federal Reserve having to push interest rates low enough to fuel another speculative bubble. Congress should not slow the package down by trying to improve it—especially by adding slow spending construction projects. It should pass it quickly and show that, for once, our partisan politicians can work together when it matters.
I’m Alice Rivlin
2007 Commentaries
12/24/07 - Avoiding the 2008 Recession
Economic forecasts for the New Year range from optimistic to downright scary. But the Recession of 2008 need not happen. The challenge is to keep a fundamentally productive economy growing while we absorb the excess houses, fix the mortgage market and unwind some dumb financial investments. The government and the Federal Reserve can’t do that alone. It will take the collective efforts of many people. Big financial institutions will have to grab the liquidity offered by central banks and keep credit flowing to worthy borrowers. Risk-averse investors will have to recover their nerve, while retaining a sensible residue of caution, and get back in the game. Rating agencies will have to restore their credibility. Housing lenders will have to work with distressed borrowers and community groups to keep families in their homes and contain the contagion of foreclosures. Businesses will have to find new profit opportunities in a turbulent world of changing technology and a weak dollar. The reliable American consumer will have to hang in there, and political candidates will have to stop sniping at each other long enough to prove that they can face up to problems and work across party lines to keep America productive. And—oh, yes—it will take some luck. Maybe we can appeal to Santa Claus for that.
I’m Alice Rivlin
11/19/07
If you think being chairman of the Fed is a nifty job, think again! It comes with vociferous advice from all sides. Wall Street wants lower interest rates—as usual. But now, they are joined by worried economists urging the Fed to prevent the disaster they see looming ahead. The worriers fear that declining housing equity will slash consumer spending. They see defaults in the sub-prime market rising as adjustable rates reset and the fallout affecting prices across vast neighborhoods. Big investors in mortgage-backed bonds are in trouble, and scary defaults cannot be ruled out. The pessimists are urging the Fed to buy disaster insurance by lowering rates.
But the economy, buoyed by exports, is still growing, and unemployment is low. With oil prices in the stratosphere and winter approaching, inflation could spike. Cutting rates can only make a weak dollar weaker, contributing to inflation and angering our trading partners. Moreover, lowering rates would reward investors who made bad decisions and set the stage for a bubble in the next asset class that catches the fancy of the moneyed herd. Sitting tight is the prudent thing for the Fed to do, but inaction will not generate affection for the Chairman. And just imagine the vituperation if the pessimists turn out to be right!
I’m Alice Rivlin
10/08/07
If you believe in a market system, you know we don’t price carbon emissions correctly. If we had the political courage to raise the price of spewing carbon into the air, we would slash pollution. But another price we don’t get right is the price of using congested highways. Highways are financed with gas taxes, and their use is normally free. But every additional vehicle on a congested highway imposes a cost on other cars using the same road—each one slows the others down.
Using a commuter route at rush hour should cost more than driving on an empty country road. If we collected money from those who impose costs on others, we could reduce congestion and pollution and improve mass transit dramatically. We need bolder action than replicating downtown London’s camera-enforced congestion fees in Manhattan or the Chicago Loop, although that would help.
Every car and truck should have a tiny transmitter and its use on congested roads should generate a bill, like a cell phone bill, with charges for the minutes it imposes costs on others by worsening traffic congestion. If we use the proceeds to provide fast, reliable public transportation, everyone will get home sooner with more breathable air and less global warming.
I’m Alice Rivlin
02/12/07
The President's bold proposal to change the tax treatment of health insurance would make the tax code fairer and might discourage some wasteful spending. If the Democrats work with the President to broaden the proposal, they could also cover millions of the uninsured.
The President proposes taxing employers' contributions to employee' health insurance and allowing a deduction for health premiums of $15,000 per family. It would no longer be advantageous to ask the boss for more health insurance rather than a wage increase. Both would be taxed equally. Workers without employer health insurance would no longer be at a disadvantage. They would get the same tax deduction as the guys in the big firm. People with high cost employer health plans would pay more taxes—yes, that's a tax increase—but generous plans encourage excessive health spending.
The Democrats could trash the President's proposal on the grounds that deductions won't help low income people who don't pay much income tax. Alternatively, they could welcome the President's opening bid and turn the deduction into a refundable tax credit for everyone. They would also have to create insurance policies that moderate earners can afford. Then we would have a fairer health insurance system that covers a lot more people. Go for it, Democrats!
I'm Alice Rivlin
2006 Commentaries
12/11/06 After a cataclysm our political system acts quickly to prevent recurrence, but sometimes we overdo it. The horrific attacks of 9/11 focused all our attention on preventing hijacking of passenger airplanes. Now we all dutifully remove our shoes, put toothpaste tubes in plastic bags, and empty the baby's bottle. The public and private cost is enormous, and some of these resources could be employed more effectively out-smarting terrorists on trains, subways, and cargo ships. The memory of 9/11 prevents us from fighting terror the smartest way.
Similarly, the accounting scandals that brought down Enron, Tyco, World Com and Arthur Anderson injured employees, suppliers, and customers, as well as shareholders, and shook our faith in corporate integrity. Congress reacted quickly by passing the Sarbanes-Oxley Act to increase transparency and accountability of corporations. The new rules have forced companies to toe the line. Corporate boards and audit committees are working harder and demanding answers to tougher questions. Internal controls in thousands of companies have been strengthened, checked, and double-checked.
But like airline security, the cost is huge, especially for small companies, and the resources are not deployed in the smartest ways. We need to reevaluate the implementation of Sarbanes Oxley to see whether its objectives could be met with smaller, more focused armies of accountants and less redundant controls.
I'm Alice Rivlin
10/16/06 The federal minimum wage has been stuck at $5.15 an hour since 1997, while inflation eroded its value by 20 percent. The purchasing power of the minimum wage is the lowest it has been since 1955. 22 states have higher minimum wages than the federal one—and several are voting on ballot initiatives in November—but Congress has not acted in nine years.
Economists used to warn that increasing the minimum wage caused businesses to cut jobs. But careful research over the last twenty years has undermined that claim. I recently joined over 600 other economists in advocating raising the minimum wage to $ 7.25 an hour. That modest increase would raise the incomes of 15 million low-wage workers, over half of whom work full time, without reducing jobs appreciably.
A higher minimum wage appeals to liberals, who don't like the extremes of inequality in our society. But it ought to appeal even more strongly to conservatives, who believe that hard work and personal responsibility are the best cures for poverty. Conservatives led the charge for welfare reform in 1996, and welfare rolls plummeted as former recipients found jobs. But if you want people to support themselves by working, wages have to be high enough to make that possible. It is high time to raise the minimum wage!
I'm Alice Rivlin
08/28/06 I just got back from Mongolia, a fascinating country of sheep-, goat- and yak-herders trying to find its place in the global economy. For almost 70 years Mongolia was a Soviet satellite, with collective herds and state owned factories, Russian-trained leaders, and almost zero contact with the West. Then suddenly in 1990 the Russian troops and subsidies vanished, a new elected government privatized the economy too fast, factories closed for lack of markets and modern management, and incomes plunged. But now life is improving again. Energetic entrepreneurs are getting the hang of producing for a market economy and democratic institutions are gaining experience. Nomadic herders still live in round tents, but there may be a pick-up truck parked outside or a solar panel for the satellite TV. There is also some nostalgia for the "socialist times," when free health care and education were widely available and income differences less extreme. The visiting Western economist wants to say, "Capitalism is more productive, so you can have both higher incomes and better public services." But is it true? In capitalist America we starve our public services and shortsightedly under-invest in education and health for low-income families, even though we could easily afford to do better. Is Mongolia doomed to follow the same path? One can only hope they have more foresight!
I'm Alice Rivlin
7/3/06 People who are paid to explain market behavior keep blaming market jitters on uncertainty about what the Federal Reserve is up to. All this volatility, they suggest, would go away if the Fed would state clearly how far they intend to raise short term interest rates and when they will do it.
But the cause of market nervousness is not the Fed's failure to communicate. It is well founded uncertainty about the future of the American economy that ought to trouble market players as much as it does the Federal Reserve. Reasons for nervousness abound. There is the endless war in Iraq and the possibility of terrorist attack. There is the fact that no one knows how high the oil price is going and whether it will cause inflation or slower growth or both. There is the fact that we are buying more from the rest of the world than we are selling and borrowing the difference from foreigners who will someday want to be paid back. There is the fact that our government, already deeply in debt, hasn't a clue how to pay for medical care promised to seniors—and, even worse, neither political party has a serious plan to address the problem.
Maybe market analysts blame market volatility on the Fed because their real worries are too scary to talk about.
I'm Alice Rivlin
5/22/06 How we handle immigration is a test of our national character and our common sense. We have tolerated illegal immigration much too long. While their vigilante tactics are cruel and distasteful, the Minutemen make a valid point. A good society does not condone breaking its own laws. It is bad for workers to face exploitation without legal rights and for employers to cooperate in undermining the rules. We have to make immigration safe and legal. Border control alone will not be sufficient. Both workers and employers must cooperate in checking new forms of identification that are hard to produce fraudulently.
But it would be morally outrageous and economically damaging to deport 12 million people whose lives are intimately entangled with our own. It would mean wrenching apart families, closing down businesses, and foregoing urgently needed services. Americans are not inhumane, nor are we stupid. The future prosperity or our aging society depends on a continuous stream of young, hardworking, upwardly mobile immigrant workers eager to make life better for themselves and us.
Can our polarized politicians craft a sensible policy that penalizes illegal immigrants already here but offers them a way to earn citizenship and also shuts down future illegal immigration with a combination of border security and enforceable identification? It's a big test of our humanity, our democracy, and our common sense!
I'm Alice Rivlin
3/21/06 Last week's budget actions on Capitol Hill were so bizarre that I almost suspect a hidden agenda. The Senate voted to increase the federal debt ceiling to nine trillion dollars, deplored the rising debt, but refused to reinstate budget rules that helped reduce debt in the 1990's. Then it passed a budget with limits on spending but violated those limits by adding billions supposedly moved from 2008. It called for entitlement reductions, but omitted instructions requiring committees to implement them. The House added nearly a $100 billion in so-called "emergency" spending outside the budget not offset by reductions in less urgent spending. Leaders in both chambers lauded the President for trying to reduce budget deficits, but failed to mention that his budget actually increase the deficits (compared with current law) by proposing tax cuts that exceed spending reductions.
Deciding what government should do and how to pay for it requires unpopular choices. It's always easier for elected representatives to make tough choices when they can point to a crisis, such as investors losing confidence in government responsibility and demanding higher rewards for buying Treasury bonds. Is it possible that budget makers are subconsciously trying to provoke a market crisis that would provide them cover for taking politically risky actions in an election year? If that is their agenda, they are doing a good job!
I'm Alice Rivlin
01/09/06 Paul Volcker was the Federal Reserve chairman who slew the inflationary dragon that attacked the American economy in the 1970's. Alan Greenspan was the skillful fine-tuner, who steered the economy through a series of shocks—the 1987 stock market crash, the Asian financial crisis, exuberance (rational and irrational) in 1990's, the market crash of 2000 and the stresses that followed 9/11. As he becomes chairman, Ben Bernanke must wonder what his legacy will be.
I suspect he will not rise to glory as an inflation-fighter. That dragon is now a tamer beast. Domestic producers are more flexible and unions less powerful. Electronic products have negligible marginal costs, and global competition holds down American wages. These factors reduce the likelihood of runaway inflation demanding drastic central bank action.
Rather, Bernanke will have to maintain economic stability as the rest of the world tires of financing American profligacy at low interest rates. The dollar will fall, perhaps precipitously. The Fed will have to work closely with other central banks to avoid a financial crisis that could push the world into recession. Promises made to the elderly also cannot be kept with borrowed money. The Fed will need a steady hand as benefits are cut and taxes raised to bring the budget deficit under control. The new chairman may yearn for the less complex challenges of mere inflation-fighting!
I'm Alice Rivlin
2005 Commentaries
11/7/05
Fierce battles are being fought this week in congress over spending cuts in this year's budget. The rhetoric is shrill and partisan. Republicans argue for reducing Medicaid and Medicare to hold down the deficit, while pushing tax cuts that make it bigger. Democrats claim programs for the poor and the elderly are being gutted, although proposed reductions are actually quite small. Whatever the result, this year's deficit will be even bigger than last year's, because both parties want more government spending than they want to pay for.
With partisan anger erupting now, one can only dread what will happen when the budget problem really gets serious, as it will very soon. The baby boom generation is retiring and all of us are living longer. Medical care is more effective each year, and everyone wants more of it. These facts will drive federal spending, mostly for Medicare and Medicaid, inexorably upwards for the foreseeable future—way beyond revenues at current tax rates.
If our politicians stick to their partisan scripts and keep trying to blame each other, they will act too late to avoid economic crisis. The only viable course is for leaders of both parties to put aside partisan differences, act like grown ups, and hammer out responsible compromises that neither side likes, but both can reluctantly support. Can they do it?
I'm Alice Rivlin
2004 Commentaries
11/15/04
The President is absolutely right to put Social Security at the top of his legislative "to do" list. We need to act quickly to reassure workers that the system so many depend on is fiscally sound. Moreover, fixing Social Security is actually quite easy—far less expensive than fixing Medicare and much less complicated than reforming taxes. No one wants to cut benefits for those already retired or close to retirement. But initial benefits for future retirees could be increased in line with prices instead of wages. They would gradually earn lower benefits than under the current system, but they could count on getting them. Alternatively, we could raise taxes and keep the higher benefits—or find a middle ground. The problem isn't hard, and the sooner we act, the smaller the adjustments need be. But the President is wrong to burden this decision with the unrelated issue of pre-funded individual accounts. Once we start arguing about whether young workers should put part of their Social Security taxes into individual accounts we make the solvency problem harder—about two trillion dollars harder. Individual accounts aren't necessarily a bad idea, but creating them means finding money to replace the taxes young people would otherwise be paying to support current retirees. Let's put the solvency problem behind us and then worry about whether we want individual accounts.
I'm Alice Rivlin.
09/20/04 When the Federal Reserve's Open Market Committee meets tomorrow, I, like most analysts, expect they will raise the federal funds rate by another quarter point. Markets will yawn. But wait a minute, isn't the recovery more wobbly than expected? Isn't inflation almost invisible despite threats that higher gasoline prices might kick it up a notch? Aren't eight million people still unemployed? So why is the Federal Reserve raising interest rates? Mostly because they want to avoid being in a tight spot a few months from now. If the recovery picks up steam, labor markets tighten, and prices start rising, the Fed does not want to be caught with absurdly low interest rates. They don't want to have to jerk rates up suddenly. Gradual moves are less disruptive. Alternatively, if economic growth should wither unexpectedly, they don't want to be powerless to help out by cutting rates. Better to raise now and have room to cut later. And then there is the problem of political appearances. Ordinarily the Fed avoids interest rate moves before an election, so they won't appear to be taking sides. But not moving tomorrow after leaving the impression they were on a measured upward track would look more political than moving. It might send a signal that they thought the recovery was in serious trouble. The quarter point is the low profile option.
I'm Alice Rivlin.
07/12/04 Like most of this audience, I believe that free market capitalism is the best hope for reducing poverty and raising living standards here and around the world. Adam Smith was right: Competition really works to produce better products and services for everybody. Of course, competition produces losers as well as winners, but out of this "creative destruction" as Joseph Schumpeter called it, emerge the innovators and the entrepreneurs that will carry the economy to its next level.
But apostles of Smith and Schumpeter can't sell our ideas effectively unless we make sure that most people have an opportunity to use their talents and share the benefits—not just the fortunate and well-positioned. What about the working mom with a low-wage job, no health insurance and no child care? She rightly perceives the capitalist system as a trap from which neither she nor her children have a chance to emerge. Giving her a stake in capitalism doesn't mean paying her not to work. It means increasing her incentives to stay in the labor force and her opportunities to get more education, seek a better job or start a business of her own. Our productive capitalist system can afford health insurance, child care, education opportunities, and employee stock ownership. If it doesn't provide them, average people here and around the world may wonder, "what's in this for me?"
I'm Alice Rivlin.
05/03/04 When the Federal Reserve's Open Market Committee meets tomorrow, I doubt they will have a fierce debate over what to do. The Committee is unlikely to raise interest rates until job growth strengthens. But they will have a lively discussion about what they say.
There was a time when the Committee didn't even tell the public what they had decided. They let market-watchers guess. Recently, however, the Fed has been less mysterious. Committee statements now say what they decided and how they view the economy. They explain how the Committee balances the risks of the economy growing too strongly or too weakly, as well as the risk of prices rising too fast or not fast enough.
Last year the Committee even confided that it did not expect to raise interest rates for a "considerable period." But confidences are hazardous. After frenzied speculation about what a "considerable period" meant, they switched to saying they could afford "to be patient" before raising rates. Tomorrow, they would like to say, "We will raise rates as soon as we are sure the economic recovery is sustainable and job growth is strong, but we don't know when that will be." That's a little too straightforward, even for the newly transparent Fed, so look for another mysterious word like "patient," and lots of pundits speculating about what it means.
I'm Alice Rivlin.
02/09/04: A New Low in Fiscal Irresponsibility—the President's Budget The President's budget proposal hits a new low in fiscal irresponsibility. It pretends to move toward budget balance while adding greatly to future deficits. The administration acknowledges that the government will borrow half a trillion dollars this year, but claims its budget will cut the deficit in half in five years. That claim is dubious at best, since the budget includes no money for the operations in Iraq after the end of September and calls for improbably drastic reductions in the growth of domestic spending.
But even if it were credible, the claim is disingenuous. Cutting the deficit in half in five years sounds like progress toward a balanced budget. It implies an intention to finish the job in, say, ten years. But watch out! The President doesn't talk about ten years because he is proposing policies that will balloon the deficit after the five-year window. He advocates making the recent tax cuts permanent and proposes new saving incentives that will cost the government a bundle over the long run. He leaves out the cost of reforming the alternative minimum tax and pushes personal accounts for Social Security without acknowledging the huge up-front cost of such a proposal.
It would have been more honest to continue the litany of "deficits don't matter," than to pretend to embrace deficit reduction while offering a budget that guarantees those deficits will keep on growing.
I'm Alice Rivlin.
2003 Commentaries
10/06/03
Realistic federal budget projections show deficits continuing at around $500 billion a year for the next ten years—and getting rapidly worse after that. By "realistic projections" I mean estimates that do not rely on silly fantasies that the tax cuts will automatically expire, or the economy will grow even faster than it did in the 90's, or spending will be cut to levels at which no president could actually run the government. We are in deep fiscal trouble, folks, and we had better rein in the politicians before they make things worse.
Citizens should demand that every politician, Republican and Democrat, take this simple pledge. "I will not advocate new spending unless I have a plan to pay for it." Each spending proposal must be linked to specific cuts in other programs or specific tax increases yielding the same amount of revenue.
The President's $87 billion for Iraq is absolutely necessary. We can't pull the troops out, and we have to help the Iraqis rebuild their country. But Congress should offset this spending with equivalent cuts in other programs or tax increases. The same goes for adding prescription drug benefits to Medicare—a fine idea, but we have to pay for it.
We had better start these pledges right now. We are really going to need them as we roll into election season!
I'm Alice Rivlin.
08/05/03
No one has a greater stake in reviving the economy than low-wage workers, especially former welfare moms. Welfare reform, passed in 1996, transformed the old welfare program, which had become a way of life for many poor families, into a way-station on the road to self-sufficiency. The new program—called Temporary Assistance to Needy Families, with emphasis on the temporary—has stiff work requirements and a five-year limit on benefits. In the boom of the 1990's, employers were eager for workers, millions of welfare mothers found jobs, and the welfare roles dropped about 60 percent. State governments, then in good fiscal shape, expanded training, job placement, and childcare programs to help low-income parents. Most former welfare families were still poor—barely scraping by in low-wage jobs without benefits—but at least they were self-reliant and gaining work experience. Welfare reform was widely judged a success.
But now many of these workers are being laid off, and hard-pressed states are slashing services to low-income families. If the hopes of the newly self sufficient former welfare families are not to be dashed, the federal government needs to act. It should help the states protect low-wage workers—especially by subsidizing childcare and medical care—at least until the economy revives and tight labor markets again make the goals of welfare reform attainable.
I'm Alice Rivlin.
06/09/03
One of the best features of the tax bill signed at the end of May was not a tax provision at all. Congress provided $20 billion to state governments over two years to mitigate their fiscal crisis. A great idea, Congress, but not nearly enough money!
The weak economy has cut state and local revenues drastically, and they won't recover quickly. At the same time citizens expect state and cities to respond to bio-terrorism, epidemics, dirty bombs, and random attacks of all sorts. Rapidly rising medical care costs are straining state and local budgets severely. The President and the Congress vow to "leave no child behind" and saddle school systems with costly rules to make it happen.
Less revenue plus more responsibilities equals acute budget distress. States are laying off workers, cutting child care services, delaying needed maintenance, and reducing the grants to local governments that enable them to run schools and provide essential services. So local governments are forced to do the same, and both must raise taxes and fees. All these actions reduce jobs and weaken the economy further.
States are facing budget gaps of about $80 billion next year alone and cities are in big fiscal trouble. Federal assistance of $20 billion over two years is a band-aid on a gaping wound. Forty billion dollars a year would be more like it!
I'm Alice Rivlin.
02/11/03
The biggest problem with President Bush's budget is NOT what he proposes for next year. It is what we will face in ten years if his proposals are enacted. The actual deficit for next year will likely be closer to $400 billion than the $300 billion he estimates, but that doesn't scare me. We need deficits for a couple of years to get the economy moving again.
The President's domestic spending proposals are stingy, but innovative. Offering states more control over Headstart, Medicaid and some housing programs is probably a good idea, although the timing is terrible. What the states need most urgently is not more responsibilities, but a slug of money from the federal government to help them deal with their own budget deficits without raising taxes or decimating programs for low-income people.
The president's huge tax cuts go mostly to high-income people, but that's not their main problem. We cannot afford ANY permanent tax cut right now. We are gearing up for war. We have 41 million people without health insurance. We have a huge generation about to claim social security and Medicare. We have a mounting federal debt that requires paying more interest. Cutting taxes is crazy! This is a reckless budget that will lead to agonizing choices and higher taxes in the future. Let's hope Congress will prove more realistic and responsible than the President!
I'm Alice Rivlin.
01/27/03
Spokesmen for the Bush Administration act as though it were unfair even to ask which taxpayers would benefit most from eliminating the personal income tax on dividends. Just mention that the biggest beneficiaries would be very high-income people and you'll be accused of fomenting "class warfare." I guess that's really bad taste.
The Administration argues that everyone will benefit because eliminating the tax on dividends will stimulate investment and create jobs. Don't count on it! Capital spending is not being depressed by dividend taxes—the same taxes we had in the investment boom of the nineties. The low rate of capital spending reflects overbuilding in the nineties, stagnant demand and the uncertainty of looming war.
On the fiscal front the proposal is a real loser. It would add at least $280 billion to the rapidly escalating budget deficit over the next ten years and further complicate our complex tax code.
This proposal flunks any test of fairness. Most people who own stock have tax sheltered pension plans that won't get any additional benefits. The big winners will be the few high-income people who own a lot of stock outside such plans. People at the high end of the income distribution have prospered mightily in recent years, compared with average families. There is no good reason for the government to give them another big boost.
I'm Alice Rivlin.
2002 Commentaries
12/23/02
In this season of gifts, what could policymakers give the American people that would revive the stalled economy and ensure both consumers and investors a more prosperous New Year? First, please, Mr. President, work hard to find a way to disarm and contain Saddam Hussein without resorting to war. A peaceful solution to the Iraq problem would not only save human lives and national treasure, it would reduce the risk of instability in the Middle East and escalating terrorism that could throw the whole world's economy into turmoil.
Second, please, dear Congress, reach an early agreement on a package of genuinely stimulative short-run measures to jump-start recovery. Extend unemployment benefits and declare a payroll tax holiday to put money into the pockets of people who will actually spend it. Incentives for business investment would be welcome, too. But please don't indulge in an orgy of tax-cutting that will balloon the future deficit. Still more tax reductions for the most fortunate among us, especially abolishing the tax on the transfer of large estates, won't help the economy grow or put people back to work. They will just exacerbate the huge gap between the struggling and the well-heeled and create bigger deficits in the future.
And what present could the Federal Reserve contribute? Nothing. They've done all they could. They should just sit tight and wish everyone a happy New Year.
I'm Alice Rivlin.
11/18/02 The prospect of war with Iraq inevitably raises the question: what would such a war cost? Most answers focus on the budgetary costs, which depend on the size and mix of air and ground forces, how long the war lasts, and the strength of the occupying army required to maintain order when hostilities cease. It is unlikely that an overwhelmingly superior US military force would take more than a few weeks to crush Iraqi defenses, or that the budgetary costs would run much over $100 billion, perhaps $150 billion at the outside. These are big numbers, but do not dominate a $2 trillion budget or a $10 trillion economy.
However, manageable budget numbers tell us nothing about the economic cost of war. Uncertainty about terrorism and possible war is already restraining capital spending and delaying economic recovery. Actual war could drive oil prices up and consumer and investor confidence down far enough to throw the American economy back into recession. The economic losses associated with recession would dwarf the budgetary costs of the war itself. Moreover, recession in the US, combined with escalating conflict elsewhere in the Middle East and terrorism around the world, would be more than enough to send the fragile world economy into a downward spiral. More optimistic outcomes are certainly possible, but no one should be reassured by budgeteers predicting a short cheap war.
I'm Alice Rivlin.
10/28/02: Bringing Back Budget Discipline The federal budget is back in the red. In fiscal year 2002 the government spent $159 billion more than it took in. The current year's deficit will be even bigger. In this weak economy federal deficits are actually good fiscal policy. Without them, recovery would be slower and more workers would be unemployed. But when the private sector returns to robust growth, deficit financing will again be bad fiscal policy—shortsighted and irresponsible. Politicians will need all the discipline they can muster to restore budget balance.
Unfortunately, this Congress discarded the tools of budget discipline. It failed to pass a budget resolution, so it had no agreed guidelines for tax and spending legislation. It passed no appropriations bills and forced the government to operate on continuing resolution. Worst of all, it allowed the Budget Enforcement Act, which specified rules for disciplining budget actions, to expire. These rules imposed caps on discretionary spending, within which Congress allocated expenditures among competing priorities. Other rules, called PAYGO rules, required that new entitlement benefits or tax cuts be paid for with offsetting tax or benefit changes in the opposite direction. These rules were a huge help to Congress in controlling deficits in the 1990's. Congress should restore budget discipline by imposing new caps on discretionary spending and enforcing PAYGO rules for tax and entitlement changes.
I'm Alice Rivlin.
09/16/02: Chairman Greenspan Rediscovers the Budget Deficit Back in the l990's, Alan Greenspan was a deficit hawk, repeatedly urging the government to cut the red ink. But when deficits turned to surpluses, he discovered a new problem that appeared to justify the huge Bush tax cut. In March 2001, he predicted that growing surpluses would eliminate the national debt and force the Treasury to invest in private securities.
The chairman's fears were unrealistic at the time. They were based on optimism about the economy, wildly improbable assumptions about government spending, and huge underestimates of the cost of the tax cut. But even an unrealistic Greenspan carries weight. He pushed the Bush tax cut over the top.
The surpluses are gone, and last week the Chairman was back in Congress warning about future deficits. But he refused to blame the tax cuts or endorse their repeal. Instead, he urged unspecified spending cuts—a daunting task in war time with mounting domestic needs and a growing older population.
Get real, Mr. Chairman! Controlling looming deficits will take both spending restraint and higher revenues. We cannot afford more tax cuts right now, especially cuts that benefit only upper income people. As Fed chairman, you should voice alarm about future deficits. But don't use your chairmanship to push a personal ideology on taxes that has nothing to do with monetary policy. Leave the fiscal choices to elected leaders!
I'm Alice Rivlin.
08/19/02 Equity investors are hoping the Federal Reserve will soon cut interest rates and give the market a bounce. Back in the booming nineties these same folks insisted that the Fed had no business raising rates to deflate stock prices. The Fed, they argued, should not concern itself with asset prices. It should maximize sustainable economic growth and raise rates only to ward off general inflation. Indeed, that view prevailed inside the Fed, which did not raise rates until mid 1999. By then, the extreme tightness of labor markets plus unsustainable consumer spending prompted serious worry about the whole economy over-heating.
The view that monetary policy should focus on the sustaining growth, not asset prices, should NOT lead to Fed to ease anytime soon, unless recovery shows clear signs of reversing. The economy will likely grow slowly until it catches up with the excess capacity created in the boom years and capital spending picks up again. The interest rate-sensitive sectors of the economy (especially housing and automobiles) are already strong and should not be further stimulated. The Fed doesn't have much more room to move and had better hoard its ammunition.
Besides, earnings prospects and corporate scandals make it tough to argue that stock prices are "too low." Fed action to give the market a temporary bounce is a bad idea.
I'm Alice Rivlin.
07/29/02 The anguished cries from State capitals in recent months reflect more than the impact of the struggling economy on State revenues, although that impact is severe. Revenue overshoots have turned to shortfalls. States have more volatile revenues than localities, which rely on relatively stable property taxes. Unlike the federal government, States cannot run deficits. When recession hits, they have to use reserves, cut spending or raise taxes to balance their budgets. States are doing all three, and face at least one more year of the same.
Recession induced State fiscal crises are not new, but they are more serious as Americans turn to State governments for increased public services to keep the economy prospering and enhance our quality of life. Citizens want schools to hire better teachers and improve school performance. They want better law enforcement, transportation, environmental protection. State spending has increased much faster than the federal government's over the last decade. Now Medicaid costs are skyrocketing, and homeland security is adding to the load.
If States are to shoulder increasing responsibilities, we need to make sure their revenue sources grow with the economy, but are not over-sensitive to its temporary ups and downs. One possibility is an automatic federal payment to States when the economy dips. Another is a broad-based consumption tax shared by all the States. Creative ideas are needed.
I'm Alice Rivlin.
06/03/02 Would somebody please explain the economic rationale for additional income tax cuts at the top end of the income distribution? You know, the future rate cuts that Congress enacted when they thought there would be big surpluses in the federal budget?
Twenty years ago, the intellectual support for President Reagan's rate cuts was called "supply-side economics." Supply-side economists argued that income tax rates were so high that people with skills weren't working as hard as they could. Taxes took such a big bite that extra effort simply wasn't worth it. They also argued that high tax rates discouraged entrepreneurs from starting new businesses and capitalists from taking risks. There was precious little evidence for these theories, but, income tax rates were higher then than now, productivity was lagging badly, and the economy was in the doldrums. A "Riverboat Gamble" on tax cuts had superficial plausibility.
But the boom of the 1990's showed that current tax rates are not an impediment to rapid economic growth, vigorous innovation, or pervasive risk-taking. After-tax incomes exploded, especially at the top of the income distribution. Productivity growth surged and continues strong. Now we have a war to finance, plus the urgent needs of a rapidly aging population, and the projected surpluses have disappeared. Will somebody give me an economic argument—not a greed argument—for cutting those top bracket rates again?
I'm Alice Rivlin.
05/03/02 The Federal Reserve's aggressive anti-recession rate-cutting has left short-term interest rates absurdly low. Indeed, real short rates are negative. The Fed would surely like them back to more normal levels. The problem is not just that low rates encourage borrowing and could eventually lead to inflation. Low rates also hamper the central bank's flexibility. If the current recovery were to sputter out, the Federal Reserve would be powerless. Like the Bank of Japan, it would not be able to stimulate economic growth with monetary policy, because rates couldn't go much lower.
The Fed's challenge is restore policy flexibility without damaging the fragile recovery. Growth of nearly 6 percent in the first quarter doesn't sound fragile, but much of that surge came from stabilizing inventory decline. Consumer spending and housing remained so strong during the recession that pent-up demand can't be counted on to energize recovery. Indeed, consumption is looking soft. Government spending is up, but private investment—the key to sustained economic recovery—still lags, especially in the crucial technology sector.
So the central bank is stuck. They don't want interest rates this low, but the short-term risk of raising them outweighs the long term risk of leaving where they are. So don't hold your breath waiting for a rate increase.
I'm Alice Rivlin.
04/20/02 The misfortunes of Enron and Andersen have dramatized the excesses of the recent boom, but there are some reassuring aspects to the fiasco. The business community has been forcefully reminded that getting caught misleading investors is punishable by death, and that audit firms whose integrity is questioned lose their clients in droves. There is no appeal from those merciless courts of investor outrage and client unease.
Moreover, executives, directors, and internal and external auditors all over the country are asking themselves: How can we be sure that our company is not the next headline? Cutting corners is out. Full disclosure is in.
Updating the rules remains necessary. The rising complexity of transactions makes it harder to explain what the hot-shots are doing, while broader corporate ownership makes it increasingly important to do so. We need new ways of guaranteeing the independence of auditors, as well as modernizing and enforcing accounting standards. In the end, however, no rules will work unless millions of unseen decisions are driven by strong desires to be above reproach.
And a miracle would help: suppose investors stopped caring about quarterly earnings! Suppose the financial press focused its time and talent on the strengths and weaknesses of companies and how they were likely to perform over the next three to five years! That would undermine incentives to overstate quarterly earnings. And wouldn't it make a more interesting Nightly Business Report?
I'm Alice Rivlin.
02/21/02 It is a shock to find the federal budget back in deficit. Only a year ago, Alan Greenspan was worried that federal surpluses would mount so astronomically that federal debt would disappear. Now a hurricane has blown us, not to Oz, but to the 1980's. We're in a recession, with defense spending rising and an unaffordable tax cut decimating future revenues. Social security balances are being used to cover deficits in the rest of the budget that stretch as far as the eye can see.
Fortunately, we are not really in the 1980's. Our economy is stronger and productivity growth is higher. The current recession is unlikely to be as deep as 1980-82. Moreover, in the 1980's deficits in the unified budget—including social security— were rising so rapidly that they threatened to get out of hand. Only drastic action could stop the inexorable rise. With the current outlook, resumption of moderate economic growth will at least put the unified budget back on the track to surplus, thanks to social security.
But the bad news is that we are running out of time, The baby boom generation begins to retire in less that a decade. We should be paying down debt now and shoring up social security quickly. It's the lateness of the hour that makes the Bush tax cut even more irresponsible than the Reagan one.
I'm Alice Rivlin.
01/24/02: Accounting Standards Do Matter! After the financial meltdown of the late 1990's there were dozens of earnest meetings about how to prevent another one. Because the crisis started in Thailand, and spread to developing Asia before engulfing Russia, the assumption was that markets in developing countries needed stricter rules. The U.S. delegates—and I was often one of them—lectured our colleagues from developing countries about the importance of transparency, full disclosure and rigorous accounting standards. Free-market capitalism, we explained pompously, was the greatest economic system ever devised, but only when lenders and investors had accurate, timely information for evaluation of risk. We inveighed against the dangers of hidden obligations, insider trading and crony capitalism. The not-so-subtle message was: "Try to behave like us!"
The collapse of Enron has reminded us all that free market capitalism is a work in progress, and the United States cannot pose as a model for the world to follow.
The basic principles aren't rocket science or even high school chemistry. The accounts of public companies, entrusted with other people's money, should be clear and complete enough so that investors, including employees, know what risks they are taking. The quickening pace and increasing complexity of transactions makes it harder to draw up the rules needed to protect the trusting many from the corrupt few. Its time to get back to work on the rules.
I'm Alice Rivlin.
2001 Commentaries
12/27/01
As Congress rushed home for the holidays, the stimulus package was left in the dust. When Congress returns they should not revive the package, but they should revive the stimulus.
Unemployment will keep rising for several more months. More and more workers are running out of benefits. There is a simple answer to that: extend the benefits. We've done it in every recession. Don't make it a bargaining chip. Just do it.
Consumer spending won't pick up soon—not with unemployment rising. Everyone knows last summer's rebate was unfair to those with too little income to get the full $300. So get the rebate checks out to those who should have gotten the last ones. And come on Democrats, get behind the payroll tax holiday proposed by Republican Senator Pete Domenici. It's a good idea and working people will spend the money.
And pass a temporary investment tax credit or increase in expensing—anything to get companies to buy stuff they need now, not next year or the year after.
Putting together a package invites party ideologues to include their favorite nostrums. Crafting the package becomes the objective, not reviving the economy. But if sensible measures come up for a vote one at a time, it will be hard for members to oppose them, and collectively they will help get the economy moving.
Forget the package, just pass the stimulus!
I'm Alice Rivlin
11/12/01 The downturn in the economy, combined with fears of terrorism, is devastating state and local government budgets. Revenues from sales and income taxes are dropping, especially in tourist dependent areas. At the same time, law enforcement and security costs are rising dramatically.
Unlike the federal government, states and localities have to keep their operating budgets balanced—no matter what happens to the economy. Their rainy day funds, if they have them, don't last long. So they cut services, freeze hiring and lay-off workers. This means less spending, both by the governments and by the laid off workers, and less spending makes the recession worse.
A temporary infusion of cash from the federal government would forestall these cut-backs and keep state and local services flowing smoothly when we need them most. If you think this sounds like reviving the revenue sharing program, you are exactly right. This is the moment to return to a good idea: having the federal government share its revenue with states and localities when recession threaten jobs and services.
Republicans prefer tax cuts to spending as an antidote for economic distress, but they also believe governments closest to the people do the most good. Moreover, revenue sharing was a Republican idea, launched by Richard Nixon. Its temporary revival in the current crisis would be a godsend to hard-pressed governments on the firing line and an effective economic stimulus.
I'm Alice Rivlin
10/29/01: Ideas & Incentives For The Stimulus Package The economy needs a quick shot of fiscal stimulus to avoid falling into a serious recession. Congress should to put aside ideology and move fast to enact an effective, temporary stimulus that will be widely perceived as fair.
To be effective the package has to stimulate immediate consumer, investor and government spending the would not otherwise take place. Measures that do that include help to the unemployed to keep up necessary spending while they look for a job, temporary incentives for new investment by companies, and a short-run infusion of funds to state and local governments to keep them from laying off workers in the face of declining revenues. Suspending payroll tax payments temporarily would also be a quick way of fattening the paychecks of workers in time for the holidays without mailing rebate checks.
The so-called "stimulus package" passed by the House is stingy to the unemployed and gives big tax breaks to corporations without providing incentives for new investment. It is generous to high-end taxpayers, who are least likely to spend their tax cuts. Even the make-up call for tax-payers missed in the last rebates would not generate checks until well into 2002. Worst of all, the package escalates future budget deficits, which raises long-run interest rates.
The House has given us a travesty, not a stimulus. If Senators can't start over, they should just kill it.
I'm Alice Rivlin
09/27/01: The US Economy Proves Tougher Than Terrorism
Catastrophe is a stress test for the institutions that keep our economy functioning. The Federal Reserve gets high marks for damage control in the wake of September 11th. The terrorists that took out the World Trade Center did not succeed in throwing the world's financial systems into chaos. Payments got made and markets outside New York continued to function. Credit goes to robust infrastructure tested in preparation for Y2K and to the Fed's ability, working with the European Central Bank, to flood the banking system with astronomical amounts of liquidity. Moreover, the Fed-doing all that a central bank can do—accelerated its aggressive rate-cutting, and will doubtless lower rates another notch on Tuesday.
The stress test for budget stimulus will be harder to pass, because it requires the president and the Congress to work together fast. Their swift action to aid New York and bail out the airlines is encouraging, but more is needed. If our politicians can resist the temptation use the crisis as an excuse to fund their pet projects or tax theories, they can help avert a destructive drop in spending without undermining long-run fiscal discipline. A rebate based on individual payroll taxes, but paid out of general revenues, not the social security trust fund-would be the fastest way to put money in the hands of low and moderate income consumers-who are the ones most likely to spend it.
I'm Alice Rivlin
08/16/01: Patience May Be The Best Policy For The Economy
With the United States economy stuck in the doldrums and fears of world recession spreading, it is tempting to point at policy makers and holler, do something! The trouble is there isn't much they can do. The Federal Reserve's aggressive series of interest rate cuts has helped keep the housing market moving, but has not yet turned the economy around. The Fed has room to lower rates further and will likely cut another quarter point on Tuesday. But if companies don't see profit opportunities ahead, they won't rush to the bank to borrow. The IRS has scrambled hard to get the tax rebate checks in the mail quickly. Their impact on spending, however, will depend on that elusive factor called consumer confidence. The Secretary of the Treasury could stop playing his broken record about wanting to maintain a strong dollar and recognize, at least tacitly, that some dollar weakening would be a boon to U.S. exports. The inflationary risk of costlier imports is minimal right now, with excess capacity here and abroad. The trouble is that the U.S. looks like a better bet than most places for the long haul, so shifting Treasury rhetoric might not move the dollar appreciably. Policy makers must feel like becalmed sailors, having positioned all the ropes and pulleys correctly, there is nothing for them to do except wait patiently for the wind to pick up. I'm Alice Rivlin.
07/19/01: Targeting Inflation
A few years ago, prominent economists were urging the Federal Reserve to state an explicit inflation target, such as two percent, and stick to it. They believed fighting inflation was the Fed's main mission, indeed, its only mission, and that it would be more effective if it told the public precisely what its goal was. Some even wanted Congress to write the inflation target into law. But neither the Fed nor Congress caved in to the inflation targeters, for which we can all be grateful. The overriding goal of the central bank should not be fighting inflation. It should be keeping the economy growing at its maximum sustainable rate, as Chairman Greenspan emphasized in his testimony yesterday. Sometimes accelerating inflation is a threat to growth, but right now inflation looks pretty benign, except for temporary spikes in energy prices. Hence, the Fed has felt free to lower rates aggressively and the Chairman made clear more cuts would follow if necessary. Contrast the unfortunate situation of the Fed's European counterpart, which is stuck with a two percent inflation target, stated in terms of a consumer price index that includes energy prices. Growth is slowing in Europe, too, but thanks to its inflation target, the European central bank can't help the Fed rev up world growth. The moral is, don't paint your central bank into a corner. I'm Alice Rivlin.
06/21/01: The True Strength Of The Dollar
A major mystery of the current economic scene is the continuing strength of the almighty dollar. The dollar, of course, has been strong for years, but it didn't used to be a mystery. Only a year ago it seemed obvious that the high value of the U.S. currency on foreign exchange markets reflected the robust American economy. We were growing faster than other industrial economies and U.S. short-term interest rates were higher than those abroad. Hence, despite our worrisome foreign trade deficits, the rest of the world regarded the United States as a fine place to put its money. Now, however, our economy is barely crawling, while Europe's is still growing and the Federal Reserve has pushed U.S. rates below those of Europe. Economic textbooks told us that slowing growth and falling interest rates would weaken the dollar. Indeed, a lot of American manufacturers wish the dollar would fall so that they would be better able to compete with European companies in world markets and replace some of their lagging domestic sales with foreign ones. But real people don't always do what the textbooks say. The mystifying strength of the dollar reflects the perception of investors all around the world that the American economic system is a well constructed machine. It may run slower for a short time, but it is a solid bet for the long run. We can only hope that they are right. I'm Alice Rivlin.
05/31/01: The Costly Side of the Tax Law
There are three good things to be said about the tax legislation just passed by Congress. First, they did get it done by Memorial Day, so we won't have to watch them wrangle all summer. Second, everyone who pays income tax will get a modest refund check in a few months, $300 for singles and $600 for couples. If we all go out and spend that money, the sputtering economy should perk up just a tad. Third, the new law takes a bit of pressure off low and middle income parents, including some who don't earn enough income to pay income tax. For the bad news, however, you have only to fast forward to 2007, 2008, 2009 and 2010 when the new law puts in place a whopping tax cuts for people with high incomes and large estates. These features were pushed into the future to hide the fact that they are huge budget busters. In fact, the biggest impact of this tax bill will come after 2011. But that is just exactly when the federal government cannot afford to lose revenue because all those baby boomers will be retiring and drawing their Social Security and Medicare benefits. So enjoy your refund. This is a short-sighted, imprudent tax cut that will put future Congresses in a bind. We can only hope they will have good sense to undo it before the damage is too great. I'm Alice Rivlin.
04/23/01: Any More Surprises In Store From The Fed
The only surprise in last week's interest rate cut by the Federal Reserve was that the press and the markets were so surprised. The Fed's Open Market Committee signaled strongly when it announced its last rate cut in March that it was prepared to act again before its May meeting unless there were clear signs that the sagging economy was reviving. Those signs have not appeared. While consumers are not in a panic, corporate earnings' prospects are weakening and most companies are not planning much investment in new plant and equipment. The pace of economic activity has slowed to a crawl with no clear evidence of a rebound. So the Fed's so called surprise should have been no news at all. It was a predictable continuation of the central bank's current and thoroughly appropriate policy of pushing rates steadily down until one of two things happen, either the economic news gets better or the Fed runs out of room to lower rates further. Fortunately, the current 4 1/2 percent short-term rate gives the Fed plenty of room to move again. They are not even close to the unfortunate position of the Bank of Japan, which is stuck with a near zero rate and no room to move down. So look for the Fed to cut another half point in May and to stay on their downward track until some visible flowers begin to bloom. I'm Alice Rivlin.
03/29/01: Out With The Old Economy & In With The New
Back in the 1990s, apostles of the new economy told us that the business cycle was dead. Flexibility and innovation had banished over capacity, inventory buildup, bear markets and slow growth economies forever. OK, so you didn't believe it. You don't find it amazing that consumers are not buying cars and computers and doodads as fast as they were, that companies are cutting production to reduce their rising inventories, or that stock prices are falling in line with future earnings. You must be over 50 or have a lot of common sense for your age. Now you are being told to worry about a new recession. The story is that the new economy keeps Federal Reserve interest rate cuts from reviving the economy the way they used to. That's because new economy companies don't deal with banks, only with equity markets, so the Fed should lower rates faster to get things going on the stock market again. Haul out the common sense. Capital markets are more important, but interest rates still matter a lot to consumers with mortgages, auto loans and credit cards, not to mention companies with lines of credit and bond financing. This new recession talk sounds a lot like special pleading from Wall Street for the Fed to bail out unwise investors and that's not a business we want the Federal Reserve to be in. I'm Alice Rivlin.
02/08/01: Other Uses For The Surplus
The latest projections of federal budget surpluses expected over the next 10 years are mind boggling numbers, multiple trillions that most of us can hardly imagine. They sound big enough to justify a large tax cut or just about anything else. These projections are informed guesses that depend on assumptions about the future. They assume that there will be no wars or other big emergencies and no major new spending programs. They assume that the economy will grow steadily at about three percent a year after inflation and that we will not have a serious recession anytime in the decade. The world is an unpredictable place and we can't be certain these surpluses will materialize. But one thing we can be certain of: Americans are living longer. Beginning about 2012 when the baby boom generation begins retiring, our under-funded Social Security and Medicare systems are going to be under enormous and increasing pressure. The 10 year period for which the huge surpluses are estimated is misleading because it hides looming budget problems just over the horizon. It would be foolish to act as though we had trillions of uncommitted resources to play with without facing the consequences of the inevitable and not so distant increase in the number of retirees. The surpluses should be devoted to shoring up Social Security and Medicare. I'm Alice Rivlin
01/17/01: President-Elect Bush's Quick Fix Economic Plan
When President Elect Bush was campaigning he didn't waste time proposing short-term fixes for the economy because there wasn't anything wrong with it. He had the luxury of concentrating on larger, more fundamental goals that would take time to accomplish. He talked about reforming Social Security, simplifying taxes and reducing marginal rates, restricting the scope of government and improving the education of America's children. A lot of us disagreed with his specific proposals on these topics but no one could deny that he was raising important issues that need to be faced. The sharp slowdown of the economy caught the new team unprepared without position papers on quick fixes for slow growth. Now as the incoming administration scrambles to put together their economic program for an unexpected situation, they need to watch out for two dangers. One is that hastily cobbled together tax legislation designed for quick passage will further complicate the already complex tax code as well as reduce the chances of future debt reduction. The other is that the much needed fundamental reforms that candidate Bush rightly emphasized in his campaign will slip off the agenda of the Bush presidency. I'm Alice Rivlin.
2000 Commentaries
12/28/00: Presidential Economic Advice
In touting a big tax cut as a cure for a possible recession the incoming presidential economic team is making two mistakes at once. First, talking gloom and doom is the surest way to turn a welcome slowdown of an overheated economy into an unwelcome and unnecessarily costly recession that could destroy a lot of jobs. Second, tax cuts are bad instruments for combating recession because they are slow to take effect and cannot be reversed when no longer appropriate. Any proposed tax cut, particularly the huge one endorsed by President Elect Bush during the campaign, will lead to long and bitter wrangles in a closely divided Congress. No economic effects of a tax cut would be felt for at least a year, more likely two, by which time any recession would probably be over. Absent a recession, a tax cut reduces the government's ability to pay off the national debt and keeps interest rates higher. A quicker, more effective way to revive the economy is for the Federal Reserve to lower interest rates. The Fed has plenty of room to cut rates right now, doesn't need Congressional action to do it and can always raise rates again if the situation changes. A tax cut should be defended on its own merits, not as a cure for a temporary downturn. I'm Alice Rivlin.
10/19/00: What's Best For Social Security
The Social Security debate sounds simple. Vice President Gore wants to protect Social Security by putting more money in it, using part of the growing surpluses in the rest of the budget to make sure the balances in Social Security are big enough to pay benefits to the growing numbers of retirees. He also wants incentives for people to save outside of Social Security. Governor Bush, by contrast, wants to allow people to take part of what they already pay into Social Security and put it into separate accounts that they can invest themselves. He thinks that even if people invest those funds conservatively, they'll get a higher return than they'd get in Social Security. That sounds simple, but watch out. Social Security wasn't set up like a private pension plan that has to have enough money in it to pay all future claims even if the company goes bankrupt. Social Security was set up to collect money from current workers and pay most of those monies out to current retirees. If Governor Bush wants to channel part of that incoming money into private accounts, he has to tell us where he is going to get the money to pay full benefits to those who are already retired now or will retire before their private accounts are worth much. That's more than a trillion dollar black hole in what sounds like such a simple plan. I'm Alice Rivlin.
09/21/2000: The Great Economic Future Debate
The presidential candidates have contrasting ideas for using the more than $4.5 trillion in federal budget surpluses estimated to be available over the next 10 years. Wait a minute, you may say, nobody knows whether those surpluses will really be there. They depend on the economy continuing to grow, and it may not. Economic forecasts are often wrong, even in the short run. Isn't a debate about 10 year budget surpluses just plain silly? You are right about economic forecasts not being reliable and about the surpluses not being a sure thing, but I think you are wrong about the debate being silly. On the contrary, in this campaign for the first time both major candidates are seriously addressing the biggest long run economic issue facing the nation, how best to prepare for the avalanche of seniors that will certainly hit the retirement rolls about a decade from now. There was a time when no one made budget forecasts more than a year in advance. Back then candidates were free to propose big spending programs or tax cuts with small impacts on the budget in the first year and big invisible costs or revenue losses in the future. Campaigning has gotten a lot more honest now that candidates feel compelled to be specific about their proposals and calculate their impact on the federal budget over 10 years. That's progress, even if the best available estimates are sure not to be exactly right. I'm Alice Rivlin.
08/24/2000: Fear Of The Fed
One might think that having passed up their opportunity to raise interest rates on Tuesday, the members of the Federal Reserve's Open Market Committee could take a long vacation and resurface around Christmas for another look at the economy. But don't count on it. It is by no means certain that the economy has settled onto a slower growth path or that inflation has died a timely death. Manufacturing continues strong and exports are rising. Consumers are ebullient and investment is flourishing. Companies are still complaining about how hard it is to find workers. With new technology still rolling out and optimism high, an economic rebound in the fall or winter shouldn't be counted out. Moreover, there's the oil price pushing up and the risk that factors counteracting wage and price increases, especially surging productivity growth and the strong dollar, may not continue to be so spectacularly helpful. If another interest rate increase seemed clearly warranted by October, would the Fed hold off because there happened to be an election? I doubt it. This FOMC is a dedicated bunch who see their role as keeping the economy on track without paying politics much mind. If they thought action were needed, I'd expect them to take it on the grounds that the country deserves their best judgment, whatever the political calendar. I'm Alice Rivlin.
07/06/2000: The Fed & The Employment Report
The cliche about the Federal Reserve these days is soft landing. That means that the Fed hopes to slow the economy to a sustainable pace without causing a recession or a hard landing. It's an appealing image, the pilot settling the plane on the runway and going home to dinner. But it's misleading. Economies don't land, they keep going. They are continuously buffeted by headwinds, tailwinds and unexpected turbulence. Their so-called pilots have unpredictable controls and imperfect information and never get to go home for dinner. The U.S. economy is on a strong upward trajectory, propelled by technological breakthroughs, management and marketing creativity, capital willing to take risks and consumers with money to spend. Factors that kept inflation under wraps for several years like weak foreign demand and falling oil prices have turned around. Inflation is creeping slowly up again. The economy fell off its previous breakneck speed in the second quarter, but the positive forces are still extremely strong. We may get a rebound as the year goes on, with inflation continuing to rise. If so, the Fed will push rates up again and face the uncertain risk of overdoing it. This dilemma could be with us for some time, perhaps several years. It's impossible to tell what course the plane will take, but one thing is certain. There will be no landing, only continuous motion. I'm Alice Rivlin.
06/22/2000: The Tobacco Bond
Securities markets keep inventing new ways to match up savers and investors who have different preferences for risk and different time horizons. Consider one new type of security, the tobacco bond. In settlement of their massive lawsuit against the tobacco industry, states and the District of Columbia were awarded a share of future domestic tobacco sales revenue. This multibillion dollar windfall faces governors and legislatures with some interesting choices. Counting on spending the money as it comes in over the years might not be prudent. Domestic tobacco sales are declining and could take a nose dive. Tobacco companies could fail or move overseas. For the states, the settlement is like inheriting a portfolio invested in a single industry. Some states would like to reduce the risk and get the money now so they could use it to finance projects of long-term benefit to citizens, reduce state debt, or invest in a more diverse portfolio. Securitization makes it possible for a state to sell its tobacco revenues to a special entity that issues bonds backed by the revenues. Of course, there's a price. Governors and legislatures have to decide whether to take less money now or bear the risk themselves in hopes of having more over the long run. It's securities markets that make that choice available. I'm Alice Rivlin.
05/11/00: The Digital Divide
One hears a lot these days about the digital divide, the chasm opening up between people who are comfortable with computers at home and at work, and people who are not. But the digital divide is just a new name for a longstanding problem. For several decades, people with degrees and book learning have been moving up and people with strong backs but little education have been falling behind. Fortunately, the digital age offers new chances to narrow that gap. First, the new economy is generating more resources, public and private, that can be used to improve education and training. If ever there were a moment for companies and communities to invest in creating a world class computer savvy workforce, this is it. Second, the digital age has given us versatile new learning tools. Computer programs can be written to teach just about anything to just about anybody, anywhere. Third, the Internet is making the intellectual resources of the whole world easily and cheaply available to physically isolated rural communities and culturally isolated urban ones. Putting computers in classrooms and hooking them up to the net is only the beginning. Teachers have to be challenged to embrace a whole new way of teaching. It won't be easy, but the digital age, instead of creating a new divide, may be giving us the first real opportunity to bridge an old one. I'm Alice Rivlin.
04/27/00: U.S. Economy Would Benefit From Stock Market Correction
When the stock market takes a serious dive, market analysts put on their long faces and headlines read "Bad Day On Wall Street!" Economic commentators speculate about whether the bull market or even the boom economy is coming to an end. But a stock market correction might be the best thing that could happen to the U.S. economy right now. The economy is growing too fast. Fortunately, most of the growth is the solid result of new technology, productivity and higher employment, creating new markets for goods and services. But part of the growth results from consumers spending paper wealth and borrowing more than they can afford. The Federal Reserve is trying to slow the economy to a sustainable pace and reduce the risk that accelerating inflation will undercut the solidly based growth. But the Fed's only instrument, the short-term interest rate, may have to be raised several more times before growth slows appreciably. A market correction could be part of the Fed's job, by cutting excess consumer spending and reducing the need to push interest rates to levels that penalize modest income homeowners and discourage small business investment. Restoring a realistic relationship between stock prices and expected future earnings, especially in the Internet sector, is also healthy. In short, a bit of steam coming out of the equity market could help keep the economic engine cruising along. I'm Alice Rivlin.
03/23/00: The Impact Of Increasing Interest Rates
The Federal Reserve's small interest rate hike this week was a central banking no brainer. The U.S. economy, spurred by eager consumers with rising wealth and income, has been galloping at an unsustainable pace. Another gentle tug on the monetary reins was clearly in order. The Fed will keep tugging until the economic horse slows to a sustainable trot. By contrast, the European central bank's recent increase seems bizarre. Growth in the major continental countries is far less robust than ours. Unemployment exceeds 9 percent. Young people have a tough time finding jobs. Why would the Fed's counterparts act to slow things down? The answers are peculiarly European. First, Europe's central bankers believe unemployment is largely caused by social benefits and reluctance of workers to move. They believe that the faster growth that has created so many jobs in the U.S. would only bring them inflation. Second, European central bankers still have a small country perspective, in which a strong currency is a matter of pride and a bulwark against inflation. They haven't figured out that they are in charge of a large continental economy where trade is heavily internal and putting idle resources to work is more important than currency value. Right now, central bankers on this side of the Atlantic have a far stronger case for tightening. I'm Alice Rivlin.
02/24/2000: History Repeats Itself When It Comes To The Federal Budget
It's time for Congress and the administration to start debating the federal budget again. We're going to hear a lot of rhetoric, both on Capitol Hill and on the campaign trail, about big government versus small government. But don't get blown away. The size of the Federal government relative to the economy is not going to change much anytime soon. Federal spending is currently just under 19 percent of our GDP what do you think it was back in the early 60's before Medicare and Medicaid and food stamps and Head Start? That's right, 19 percent. Between the 60's and the mid 80's, the federal share drifted up to 23 percent then came back down to 19 again, as defense spending receded after the cold war. It's likely to stick there. Both parties believe the defense establishment needs shoring up, not more cutting, and benefits for older Americans, which drive the domestic budget, will rise about as fast as the economy over the next decade. The president's budget is an honest one, based on conservative economic assumptions. It wisely acknowledges that the strict caps put on discretionary spending in 1997 are no longer realistic. It proposes a bunch of relatively modest domestic spending initiatives, not all of which the Congress will buy. It's a solid entry in a Congressional debate that's likely to sound more dramatic than it really is. I'm Alice Rivlin.
01/27/00: The Interest In Interest Rates
Should the Fed worry about whether the stock market is overvalued? Well, why not, you may ask. Everyone else does. Certainly everyone who watches this program. Actually, I think the answer is no. Worrying about market valuation is your job if you are an equity investor not the central bank's. Equity investors face a quandary right now. By historical measures such as price earnings ratios, stocks are mighty pricey these days, especially the high tech high flyers and the dot.com companies that haven't made a profit yet. But historical standards may be changing. More and more people own stock and believe that equity investment is a smart deal for the long haul. They may require a lower premium over bond yields than equity holders used to. Moreover technology is transforming the world economy and the Internet may produce a great leap in productivity, choice and convenience. Some of those dot.coms may make a lot of money. Your job is to figure out which ones. The Fed's job is to keep its focus on the whole economy to help it grow at a sustainable rate to avoid overheating and inflation. Stock market values are relevant only as one factor adding to total spending pressures when people with unrealized gains buy more because they feel wealthier. It's the total spending the Fed should judge, not the market values. I'm Alice Rivlin.
1999 Commentaries
12/16/99:
At its pre-Christmas meeting next week, the Federal Reserve's open market committee is not likely to put a lump of coal in the economy's stocking by raising the short-term interest rate. However, with consumers spending up a storm and employers scrambling for workers the committee may want to tone down the euphoria by coupling inaction with a hint that it is considering an increase early next year. The fact that the Fed hasn't felt obliged to push rates up faster is partly due up to a fine early Christmas present in the form of a fiscally responsible federal budget.
The fiscal year 2000 budget, belatedly worked out by the president and the Congress just before Thanksgiving, preserved the Social Security surplus intact, or came very close. As a result, the government is paying out considerably less than it is collecting from taxpayers, thereby offsetting some of the exuberance of the private sector.
Earlier in the year, there was talk of cutting taxes. A substantial tax cut, even one whose revenue impact was largely in the future, would have stimulated an already hot economy, increased the risk of inflation and forced the Federal reserve to raise interest rates preemptively. But the tax cut didn't happen and with any luck won't happen next year either so the Fed is under less pressure to raise rates quickly. That adds to the holiday cheer.
I'm Alice Rivlin.
11/11/99:
When the Federal Reserve's open market committee gets together next Tuesday, it will once again be facing the puzzle of American economic success. Is the strong performance of the U.S. economy the result of a fluky combination of temporary forces or is some fundamental change making our economy more productive and less prone to inflation than it used to be?
The most recent spate of statistics has reassured the optimists. Growth continues strong, unemployment is at a 30-year low and inflation remains blessedly benign. Productivity growth is surging again as managers faced with acute labor shortage exploit new technologies to improve efficiency. But some special factors have been holding down price increases and may be reversing. Recovering world demand is likely to push commodity prices higher.
The dollar may decline further in the face of attractive investment opportunities abroad and health care costs are rising faster again. If consumer spending continues to roar along, reinforced by growing demand for U.S. exports, labor scarcity may finally increase the pace of wage growth and, ultimately, prices. So the open market committee must decide once again: should it stand aside and let the stellar performance continue to play out, reasoning that waiting is riskless with inflation expectations so low or should it push up rates one more precautionary notch, forestalling a surge in equity markets which could fuel even stronger consumer spending? It's a close call.
I'm Alice Rivlin.
Copyright © 2001 Community Television Foundation of South Florida, Inc.
Source:Nightly Business Report
Note: The views expressed in this piece are those of the author and should not be attributed to the staff, officers or trustees of the Brookings Institution.