ClydeR
06-22-2009, 12:48 PM
Frederic Mishkin, former member of the Federal Reserve Board of Governors, opines in the Wall Street Journal that the Fed cannot responsibly take needed stimulative action because of the government's long-term debt problem.
Although an expansion of Treasury bond purchases by the Fed would have the benefit of lowering long-term interest rates temporarily to stimulate the economy, in the current environment it could be dangerous for two reasons. First, it might suggest that the Fed is willing to monetize Treasury debt. The Fed does not, and should not, want to make it easy for the Treasury to sell its debt and thereby be an enabler of fiscal irresponsibility. Second, if the Fed loses its credibility to resist pressures to monetize the debt it could cause inflation expectations to shift upward, thereby leading to a serious problem down the road.
The Fed is boxed in. The slack in the economy that is likely to persist for a very long time suggests the need for stimulative monetary policy to lower long-term interest rates through the purchase of Treasurys. The fiscal situation argues against this policy action, because it would weaken the Fed's inflation-fighting credibility.
More... (http://online.wsj.com/article/SB124562899626335803.html)
He then goes on to say that entitlement reform and taxing healthcare benefits are one way forward.
One possibility is to establish a nonpartisan commission on entitlement reform, along the lines of the National Commission on Social Security in the early 1980s. It produced recommendations that for a time helped put Social Security on a more solid footing. Another is taxing health-care benefits as part of any package to reform health care. Taxing health-care benefits would not only generate large amounts of revenue. It would also increase the incentive for people to lower the costs of their health care. There are surely many other ways to promote more fiscal responsibility.
The Fed can assist this process. It could indicate that implementing measures that would promote fiscal sustainability will be rewarded with Federal Reserve actions to bring long-term Treasury rates down. Deals like this have been successfully made in the past. In the current extremely difficult economic environment, we surely need such a deal now.
My view is that taxing healthcare will be a difficult sale. In the 2008 campaign, McCain proposed taxing employee healthcare. Obama made McCain's proposal a major point of distinction between the two candidates. Unless a tax on healthcare is structured in a way that is dramatically different from the one proposed by McCain -- and more importantly, is perceived by the public as being dramatically different -- then it could be Obama's "read my lips" moment.
Although an expansion of Treasury bond purchases by the Fed would have the benefit of lowering long-term interest rates temporarily to stimulate the economy, in the current environment it could be dangerous for two reasons. First, it might suggest that the Fed is willing to monetize Treasury debt. The Fed does not, and should not, want to make it easy for the Treasury to sell its debt and thereby be an enabler of fiscal irresponsibility. Second, if the Fed loses its credibility to resist pressures to monetize the debt it could cause inflation expectations to shift upward, thereby leading to a serious problem down the road.
The Fed is boxed in. The slack in the economy that is likely to persist for a very long time suggests the need for stimulative monetary policy to lower long-term interest rates through the purchase of Treasurys. The fiscal situation argues against this policy action, because it would weaken the Fed's inflation-fighting credibility.
More... (http://online.wsj.com/article/SB124562899626335803.html)
He then goes on to say that entitlement reform and taxing healthcare benefits are one way forward.
One possibility is to establish a nonpartisan commission on entitlement reform, along the lines of the National Commission on Social Security in the early 1980s. It produced recommendations that for a time helped put Social Security on a more solid footing. Another is taxing health-care benefits as part of any package to reform health care. Taxing health-care benefits would not only generate large amounts of revenue. It would also increase the incentive for people to lower the costs of their health care. There are surely many other ways to promote more fiscal responsibility.
The Fed can assist this process. It could indicate that implementing measures that would promote fiscal sustainability will be rewarded with Federal Reserve actions to bring long-term Treasury rates down. Deals like this have been successfully made in the past. In the current extremely difficult economic environment, we surely need such a deal now.
My view is that taxing healthcare will be a difficult sale. In the 2008 campaign, McCain proposed taxing employee healthcare. Obama made McCain's proposal a major point of distinction between the two candidates. Unless a tax on healthcare is structured in a way that is dramatically different from the one proposed by McCain -- and more importantly, is perceived by the public as being dramatically different -- then it could be Obama's "read my lips" moment.