The Deficit Threatens Fed Independence
I too attended yesterday's Peterson-Pew Commission on Budget Reform Policy Forum, and I highly recommend that you watch it for several reasons:
1) Kansas City Fed President Thomas Hoenig offered a blunt and chilling statement:
"It is a fact that the current outlook for fiscal policy poses a threat to the Federal Reserve’s ability to achieve its dual objectives of price stability and maximum sustainable long-term growth, and therefore is a threat to its independence as well." In other words, future deficits are so large that the Fed may lose the political support it needs to stop inflation.
2) Peterson Foundation President and Former Comptroller General of the United States David Walker gave a succinct and compelling critique of federal budgeting. This is the famous speech he has given in just about every state in the country over the past several years. It's short in riveting.
3) Morgan Stanley Chief U.S. Economist Dick Berner predicted that interest rates could rise sharply to 5½% on the 10 year Treasury from 3¾% currently in a year or two if we do nothing about our deficits as foreign investors just slow down their purchases of Treasury debt. Sharply rising interest rates will make it difficult to restore a strong economy.
4) Former Congressmen Charlie Stenholm (D-TX) and Jim Kolbe (R-AZ) offered their views after fighting in the deficit reduction trenches during their long careers. Of particular interest to me was their assessment that the American people need to be told the truth -- what a concept -- but no one is doing that yet.
5) Former Congressional Budget Office Directors Rudy Penner, Bob Reischauer, and Doug Holtz-Eakin explained more detailed economic and political dynamics of deficit fighting. Doug proposed one metric for measuring progress, or the lack of it, in reestablishing responsible budgeting, the public debt as a percentage of GDP. It was 36.2% at the end of FY07, 40.2% in FY08, 53.0% in FY09, and it's headed to 60% in FY11. That burgeoning debt is unsustainable.
6) Former Clinton White House Chief of Staff John Podesta brought the view from a Democratic White House. As you might expect, he laid the blame squarely on President George W. Bush for large tax cuts, two wars, and Medicare Part D, none of which were paid for. Now that we're in this mess, he doesn't see any way out without higher taxes on the rich.
7) Top economists Martin Bailey of Brookings and the Peterson Institute and IMF economist Carlo Cottarelli ably presented the latest research on the economic crisis and what needs to happen for the U.S. to return to a reasonable economic growth path.
8) Political Scientist Norm Ornstein, Atlantic Monthly Senior Editor Clive Crook, and Clinton/Gore campaign spokesman Jamal Simmons gave their observations on the breakdown of governance in Washington and back home. Ornstein recommended mandatory voting to restore the middle in U.S. politics. Crook concluded that the public is not scared enough of deficits yet to force their leaders to make tough decisions.
I saw a lot of good friends in the room, so I came away with some hope that we might restore some fiscal responsibility over the next few years, but I admit, it's going to take a lot more than one good conference to make that happen.
I commend Committee for a Responsible Federal Budget President Maya MacGuineas for putting such a fine program together and for an excellent job moderating it.
Here's the event summary.
"Monetary policy has two
"Monetary policy has two basic goals: to promote "maximum" sustainable output and employment and to promote "stable" prices. These goals are prescribed in a 1977 amendment to the Federal Reserve Act."
http://www.frbsf.org/publications/federalreserve/monetary/goals.html
Thomas Hoenig is right that political support for achieving "price stability and maximum sustainable long-term growth" will wane with 10% unemployment; happily, it is his job to fight that unemployment.
Also, is there any empirical data that suggests that returning tax rates to their 1990s levels (or even raising them a point or two higher than that) would harm growth? The experience of the 1990s suggests that slight changes in high tax brackets do not discourage or prevent growth.
Jim Kolbe deficit warrior? LOL!
Jim Kolbe never met a tax break for millionaires he didn't like. He voted for the unfunded wars on Terror while simultaneously voting on the Bush Tax cuts and bills to make them permanent. He voted for the unfunded medicare drug benefit, as well.
Now that he and his party have driven the economy into a ditch he wants to cut entitlements. What a surprise.
Investment advice: Buy stock in fancy feast.
What Doofus Said
Hoenig: "It is a fact that the current outlook for fiscal policy poses a threat to the Federal Reserve’s ability to achieve its dual objectives of price stability and maximum sustainable long-term growth, and therefore is a threat to its independence as well."
As Dean Baker noted, the law differs from Hoenig's misinterpretation; "In fact, the dual mandate is full employment (defined as 4.0 percent unemployment) and price stability."
(http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=12&year=...)
Since it is now clear that at least two voting members of the FRB don't know what their job is, their pontifications about how they are "politically independent" is revealed for the horse puckey it is and always has been.
Strangely, Mr. Andrews appears to have missed noticing this.