In their paper delivered at the Fed's Jackson Hole meeting Aug. 22, Alan Auerbach and William Gale note that fiscal stimulus in the Great Depression and in Japan's Lost Decade was inconsistent at the federal level and further undermined by tax increases and spending cuts at the state and local level. In America, with states expected to cut spending or raise taxes by $350 to $450 billion by the end of 2010 and more thereafter, how potent is the risk of a similar undermining of the Obama stimulus, most of which hasn't yet been spent? Is it a strong argument for a second stimulus, targeted to states?
-- John Maggs, NationalJournal.com
3 responses: Grover Norquist, Brian Riedl, Charles Calomiris
The daunting, perhaps unprecedented, practical and political challenges to budget-making are leading some reformers to wonder what other process could work better. Eric Leeper, in a new paper, notes the disjunction between the process for monetary policy -- arguably independent of politics -- and fiscal policy, which is dominated by politics. He argues that a Fed-like approach might be even more important for budget-making, and leaves us wondering whether the time has come to contemplate such a change. Should we and could we create a Fed for the budget?
-- John Maggs, NationalJournal.com
6 responses: John Maggs, James K. Galbraith, Len Burman, Edward Leamer, Gerald Prante, Alan J. Auerbach
Assuming the consensus is right and the U.S. economy has begun or will soon begin an economic recovery, assess the effects of the unprecedented budget deficit on that recovery. Will the deficit be large enough in 2010 to seriously undermine a recovery with higher interest rates? Does it preclude additional stimulus if the recovery flags? What are the prospects for government taking steps to bring debt and deficits down to nonthreatening levels?
-- John Maggs, NationalJournal.com
6 responses: Charles Calomiris, Desmond Lachman, Isabel Sawhill, Grover Norquist, Robert Litan, Gary Burtless
Through asset purchases and a new policy of paying interest, the Fed has built up an unprecedented amount of excess reserves, held on behalf of banks. From as little as $2 billion two years ago, the most recent tally was $744 billion. If the banks draw down these reserves quickly, that could lead to excessive inflation. Will the Fed be able to manage the reduction of these reserves as the banks demand them? Will it be forced to pay much higher interest rates? How will this affect monetary policy through its other lending operations?
-- John Maggs, NationalJournal.com
4 responses: Desmond Lachman, Charles Calomiris, Alan Meltzer, J.D. Foster
Personal savings rose again in the second quarter to 5.2 percent. How high might they go, and how significant a negative would this be for a potential recovery in the coming months? Will Americans loosen their spending if housing stabilizes, albeit at levels that represent much less wealth? Savings increased at an annualized rate of a little under $140 billion in the quarter, roughly equivalent to the $148 billion (in real terms) in larger government transfer payments. Does this mean the stimulus tax cut has failed, as the 2008 tax cut stimulus did?
-- John Maggs, NationalJournal.com
5 responses: Isabel Sawhill, Jeffrey Frankel, Gary Burtless, John Maggs, Charles Calomiris
