Economics Update (April-June 1998)

Economic Lessons for the Future
Explored at Atlanta Fed Conference

W ith the United States enjoying one of the longest economic expansions since the end of World War II, U.S. policymakers are pondering which economic factors will be important to consider in planning for the future. A panel of economic experts recently gathered at a conference in Atlanta to discuss such issues. The conference, "Economic Prosperity: Lessons for the Future," was cosponsored by the Federal Reserve Bank of Atlanta and Oglethorpe University.

Topics discussed included how potential U.S. budget surpluses should be spent, the future of Social Security, the European Monetary Union and the new economic paradigm. Panel members were Janet Yellen, former Federal Reserve governor and current chair of the President's Council of Economic Advisers (CEA), former CEA members John Taylor and Paul Wonnacott, and former Federal Reserve Governors Lyle Gramley, Robert Heller and Nancy Teeters. Each of the panelists spoke on what he or she considers crucial issues.

Janet Yellen (center), chair of the President's Council of Economic Advisers, takes part in a panel discussion at an Atlanta Fed conference on potential lessons to be learned from the U.S. economy's recent success. Former Federal Reserve Governor Lyle Gramley (left) and former CEA member John Taylor (right) also participated in the discussion.

A Variety of Economic Insights

Yellen focused on what she called 21st century problems, such as Social Security. She noted that President Clinton's program to save Social Security is his top priority. Yellen reiterated the standard indictment of the program: declining taxpayer/beneficiary ratios and increasing life expectancies that are expected to make the system insolvent before the middle of the 21st century. Without endorsing a specific solution, Yellen said she favored reserving the anticipated U.S. budget surplus to augment private savings. She also noted that every $100 billion transferred to the Social Security Trust Fund delays exhaustion by one year.

Teeters also weighed in on Social Security, stating that recent U.S. history has been able to compensate for politically popular tax cuts with Social Security payroll tax increases. This fact, she said, complicates any discussion of Social Security or budget surpluses, but, in any case, politicians will continue to fight over both.

The Current Expansion and Other Issues

Several panelists discussed the success of the U.S. economy and how the country got to this point. Taylor argued that monetary policy had made all the difference for both the current and previous economic expansions. In the current expansion, he said, Fed vigilance toward inflation has paid big dividends.

Wonnacott noted, however, that the next five years would be "less fun" for Fed governors than the previous five. He also expressed concern about free trade since neither political party seems strongly committed to it. But free trade will be an easier political sell, he believes, if it is likened to improvements in technology — short-term effects may be negative, but over time it creates better jobs.

Among other views, Heller discussed the European Monetary Union, calling the concept "the wrong thing at the wrong time." Europeans, he observed, should not "be worried about a common currency when MasterCard and Visa already serve the same purpose."

The panelists debated whether a new economic paradigm — in which structural changes have permanently altered the economy's average growth rate and unemployment rate consistent with stable inflation — has emerged. Gramley believes this paradigm is flawed. Eco-nomic growth is not unlimited, he said, because it is ultimately determined by productivity growth, which is also not unlimited. He believes the economy cannot grow at more than 3 percent without risking inflation. Taylor was also skeptical about the economy's potential for higher growth in the absence of stronger evidence of faster productivity growth.

Disputing the paradigm's assumption that productivity growth is significantly higher than measured, Taylor advocated adopting a rate of, say, 2 percent productivity growth — comparable to rates in earlier decades — as a national economic policy goal. Doing so, he said, would simultaneously address other national problems, not just Social Security and a serious income distribution problem. The panelists advocated some measures to achieve this end, including tax reforms that encourage savings, regulatory reform, paying down the public debt, a commitment to free trade and an education policy that results in higher student proficiency in technical areas like math.

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