Economics Update (October-December 1997)

Economic Policy Fuels Current
Economic Performance

"Good monetary policy alone or good fiscal policy alone is insufficient to produce the best outcome."
— Jack Guynn

T he combination of robust economic growth, low unemployment and modest inflation has helped provide the best U.S. economic performance in nearly a generation — including the third-longest expansion in the post-World War II period.

Jack Guynn, president and CEO of the Atlanta Fed
Should we really be surprised by the strong performance of the economy? Jack Guynn, president and chief executive officer of the Federal Reserve Bank of Atlanta, posed that question to attendees of the recent annual meeting of the National Association for Business Economics in New Orleans. In his remarks, Guynn said that, while the economy has performed well, he is not surprised by its success because of the contributions of both monetary and fiscal policy during the current expansion.

Many observers cite contributions other factors, such as "positive shocks," to success economy. These include low price oil, strong dollar, slack economic activity outside United States, increased globalization has intensified international competition, productivity payoff from investment, especially in computers. Guynn addressed views when he said, "These certainly boosted level of real GDP; however, many analysts have gone further and asserted that these factors are responsible for keeping low. I think those claims about inflation may miss the boat."

Guynn went on to say that what has really helped to lower inflation is the implementation of sound monetary and fiscal policies, which distinguish this current expansion from those of the past. But, he cautioned, "Good monetary policy alone or good fiscal policy alone is insufficient to produce the best outcome."

What's Different About This Expansion?

To emphasize the importance of monetary and fiscal policies working together, Guynn compared today's expansion to the economic period in the late 1970s and early 1980s that featured high levels of inflation. During the late 1970s, the stance of monetary policy became increasingly anti-inflationary, and in the 1980s inflation declined. However, fiscal policy, as measured by the federal budget deficit, became more unbalanced, and the nation mounted high levels of debt.

The expansion of the 1990s tells a different story. According to Guynn, "The substantial progress on reducing the deficit surely helped improve the performance of the economy by lowering interest rates and contributing to the credibility of our low inflation policy. It was not until both monetary and fiscal policies were well positioned that we observed economic activity that could be called surprising."

For the Future

Contemplating the economy going forward, Guynn stated, "I worry because of our inability so far, on the fiscal side, to address the approaching financing requirements of the aging baby-boom generation — the Medicare and Social Security problems."

Nonetheless, Guynn said that he remains optimistic when he considers how far the economy has come after overcoming numerous hurdles. "We have made many difficult decisions — we fought inflation and we remain vigilant; we have made substantial progress in reducing the federal budget deficit — and we have a good economy to show for it."

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