On the Record

Fed More Concerned About Deflation Than Inflation

Alice M. Rivlin

Alice Rivlin talks to Bloomberg’s Tom Keene about U.S. monetary policy, the budget deficit, unemployment, gross domestic product and health care.

KEENE: …With me Alice Rivlin. You know her from the Brookings Institution, the former vice chairman of the Federal Reserve, and, of course, the founder of the Congressional Budget Office.

Dr. Rivlin, we’ve never seen it like this. We’re trying to bring back PAYGO. Let me ask the dumb question of the show. Why was PAYGO eliminated? Why did PAYGO go away?

RIVLIN: Well it went away in 2002 because the Bush administration didn’t want to be bound by it. PAYGO is a budget rule which says if you’re going to cut taxes or you’re going to add to entitlement spending like Social Security or Medicare you have to pay for it. You have to find an equal and opposite effect on the budget over a ten year period.

Now that was constraining. It was very constraining in the period in which it operated which was 1990 through 2002, and it helped bring us the budget surplus that we enjoyed at the end of the ’90’s. But the Bush administration simply didn’t want it and when it lapsed it was extended in ’97 for five years. When it lapsed in 2002, they did not support continuing it.

KEENE: And your latest epistle here from Brookings ‘Statutory PAYGO: An Important First Step Towards Fiscal Responsibility.’ Is the Rivlin PAYGO of 2009 – is that the same as the PAYGO of the late ’90’s?

RIVLIN: Well it’s the same ideal and in that testimony which was for the house budget committee a couple of weeks ago, I said we should restore PAYGO because it was very helpful in keeping the budget deficit under control but it’s not enough.

The PAYGO rules basically say you can’t make the budget deficit worse but they don’t do anything to bring it down. And we really need now – we, the country – effective measures that will bring the budget deficit down substantially over future years.

KEENE: Help us with a marker – the long term trend. Ed McKelvey at Goldman Sachs has a distressing ten year trend if we get away from 13 percent of GDP or $1.5 trillion plus and we bring it down. What is a normal deficit within the political maelstrom? Is it $300 billion that we need to get back to or is there a new marker?

RIVLIN: I find it easier to think in terms of percent of GDP.

KEENE: Sure.

RIVLIN: During the late ’90’s, we got the budget into surplus which was the first time in a long time and a very good thing. But then through the begin-ning of this decade or really until the recession hit, budget deficits were in the range of two or three percent of GDP.

Now that’s not off the charts. We could handle that as a permanent thing. But the problem is that the promises that have already been made under Social Security and Medicare and Medicaid will make government spending go up even if we do nothing.

Those promises are inherent in the structure of those entitlement programs, particularly Medicare and Medicaid as the population ages and as medical care gets more expensive the outlays for those programs rise. So we have a built in rising deficit in the future even if we get past this recession-related huge problem that we have at the moment.

Listen to the full July 6th interview at Bloomberg »