Ever since the United States officially climbed out of the latest recession, uncertainty has remained about the economic future. People have asked what government should do to help give the economy a boost. Those who attended this year’s John W. Pope Lecture at North Carolina State University heard ideas from Michael Boskin, senior fellow at the Hoover Institution and professor of economics at Stanford University. Boskin shared some of his ideas with Mitch Kokai for Carolina Journal Radio. (Click here to find a station near you or to learn about the weekly CJ Radio podcast.)
Kokai: What do we need to do?
Boskin: On the policy front, both monetary and fiscal policy should have a more coherent exit strategy from their extreme responses to the severe financial crisis. Whether you believe they were right or wrong, they could have been improved, they should have been done somewhat differently, as I do. But right now, no one’s quite sure when and where the Fed’s going to exit. It’s fine if they want to get some more data, but they should provide more information about how they’re going to unwind their balance sheet from this extreme holding of a wide range of assets — the mortgage-backed securities and so on.
The Fed is now the largest holder of treasuries in the world, more than the Chinese and the Japanese, who are second and third. So they’re going to have to not only raise interest rates as the economy improves, and simultaneously shrink their balance sheet — or in conjunction shrink their balance sheet — they need to give a little more information about how they’re going to do it. They’ve said they know how to do it. They have the tools. But if they could provide a little more clarity on that, that would reduce some uncertainty.
Right now, there’s a growing anxiety about the risk of inflation. There’s a substantial inflation in commodity prices, not generally. Inflation is getting bad in the developing world, and Russia and China and India and Brazil are starting to see higher and higher inflation — not the historic banana-republic levels in Latin America — but concern for their central banks, and they’re trying to cool their economies some. And people are increasingly concerned that will flow generally into inflation, as the developed economies improve, and especially with the Federal Reserve having this huge overhang of excess reserve sitting there for banks to lend. We want banks to lend, but as they start to take the excess reserves the Fed has created for them by buying all these securities, they start adding that to the money supply, eventually — not immediately, but eventually — it will become inflationary.
So the Fed’s got a tricky exit strategy. It’s more complicated than usual, and sometimes in the past, even just the regular exit from low interest rates has beguiled the Fed. They’ve been too late, and we’ve gotten inflation. So the worst of all outcomes is we’d go through all this economic downturn, high unemployment, a horrible recession, and then wind up in a few years with bad inflation and have to go through another boom-bust cycle.
Simultaneously, on the fiscal side, we very much need to have a clear exit strategy about consolidating the budget. In my view, it should be overwhelming on the spending side, but whatever they decide, so that we know there won’t be that pressure to monetize it, No. 1. Businesses will have some certainty about what their future taxes will be and so on, so they won’t worry there will be large, looming tax hikes. That’s one of the things that has delayed hiring: President Obama’s noneconomic crisis response on things like health care and so on, which were kind of sold partly to do with the crisis, but had nothing to do with the crisis … whether you believe that they’re a good idea or not — I think that what was done was not a good idea — but they’re adding a lot of costs, and firms were unsure about the regulation and the cost, and especially small businesses have delayed hiring.
So those are two big ones. On the financial regulation side, we need a lot of clarity, and we should be moving more toward things like enhanced bankruptcy, so a too-big-to-fail institution could quickly be unwound, so you wouldn’t cause a run if it got in trouble. And less on this command-and-control regulation. We, in fact, have institutionalized too-big-to-fail with [the] Dodd-Frank [financial regulations]. There’s been a big increase in the concentration of assets in the largest banks. By being deemed too big to fail and having the government’s backing, investors will lend them money at lower rates, so they’re making it harder for smaller, well-run banks to compete in the capital market and compete against them. So we’re going to have to adjust these things.
Kokai: Do the people in Washington get it? Do they understand changes need to be made?
Boskin: Well, I think it varies by person and by party, and within each party there are people who are more limited-government and larger, big-government. You know, the Republicans tend to be for more limited government than the Democrats, although there’s some overlap. So what tends to happen is many people tend to be very much in favor of more limited government, balanced budgets, low taxes, and limited spending in the abstract, in general. And then when it comes to their specific program that tends to affect them, they’re big-government and let other people pay for it.
And we need to unravel that and have a deep conversation. There’s vast amounts of inefficiency and ineffectiveness in the federal budget, which ought to be unwound, even if we didn’t have the financial crisis and the big deficit and debt. But it’s especially important we do that. There’s massive cross-hauling in the budget. North Carolinians pay taxes to the federal government to send money to North Carolina and other states, to spend on things they wouldn’t vote for state and local taxes to pay for. That doesn’t make a whole bunch of sense in most instances. In some, it does, if there are multistate benefits and you need a higher order of government to intervene. We pay large amounts of money for idle cropland. We pay large amounts of funds to subsidize ethanol, which drives up food prices, and is not only harmful here, but especially in the developing world, where people spend a much higher fraction of their budget on food, and actually on balance probably harms the environment.
So we need to have a serious conversation about these things and what can be an orderly consolidation, elimination of things that aren’t doing well and we don’t need to do, consolidation of programs. We have something like 47 job training programs. That’s a rough estimate. That may be off by a little. And there’s no reason those shouldn’t be consolidated and voucherized, so people who we need retraining for, who need retraining, can get something that’s really commercially useful for them, in a more effective and more efficient way.
… We need the government to have one-stop-shopping solution centers. We’ve got 42 percent of federal civilian employees who are due to retire over the next decade, and we could let that attrition occur and replace half of them with technology and improve services, save hundreds of billions of dollars. Technology executives look at how the federal government handles its IT and say, “You could save a trillion dollars in a decade by streamlining supply centers, by consolidation, by using the advanced business analytics private firms do to identify improper payments, by moving off of immense amounts of custom code into standardized software that businesses use.”
So we need kind of that substantial transformation, and the president’s talking about stabilizing one-sixth of the budget at the extreme elevated levels from the stimulus and the crisis, that’s gone up 25 percent in its baseline and over 80 percent when you include the stimulus spending. That’s ridiculous. We don’t need nearly that much spending on that part of the budget.
And we have to have a serious conversation about sensible Social Security and Medicare reforms that phase in gradually, so they don’t affect current retirees and people soon to retire, but so people who are now young workers and people who aren’t in the labor force yet, when they retire, there will be a sensible Social Security system that keeps them out of poverty. But we don’t just rely on that to replace their wages, that there’s a more comprehensive private saving program that they’ve been able to access and plan for. Those kinds of things, we should be able to have an adult conversation and make sensible changes, especially because of the financial crisis, and I’m cautiously optimistic that many of the new members of Congress understand that.
There will be a political battle between Republicans and Democrats, between the House and the Senate, perhaps, and between the Congress and the president. The president wants a larger government, wants to move us part way toward a — a sizeable way, in my view — toward a European-style social welfare state. I think that’s a bad idea. But that battle’s going to be enjoined over the next couple of years, and I’m cautiously optimistic we’ll get to something more sensible over time.