For decades, monetary economists viewed central banks as the “last movers.” They were relatively nimble in their ability to adjust policy to stabilize the economy as signs of a slowdown arose. In contrast, discretionary fiscal policy is difficult to implement quickly. In addition, allowing for the possibility of a constantly changing fiscal stance adds to uncertainty and raises the risk that short-run politics, rather than effective use of public resources, will drive policy. So, the ideal fiscal approach was to set policy to support long-run priorities, minimizing short-run discretionary changes that can reduce economic efficiency.
Today, because conventional monetary policy has little room to ease, the case for using fiscal policy as a cyclical stabilizer is far stronger. Unless something changes, there is a good chance that when the next recession hits, monetary policymakers will once again find themselves stuck for an extended period at the lower bound for policy rates. In the absence of a monetary policy offset, fiscal policy is likely to be significantly more effective.
Against this background, a new book from The Hamilton Project and the Washington Center for Equitable Growth, Recession Ready: Fiscal Policies to Stabilize the American Economy, makes a compelling case for strengthening automatic fiscal stabilizers. These are the tax, transfer and spending components that change with economic conditions, as the law prescribes…. Read More
In an effort to understand the dynamics of the distribution of consumption, income and wealth, over the past decade, there has been an explosion of research. While important debates about measurement and data interpretation continue, a range of evidence points to two important conclusions. First, over the past two centuries, the global income distribution has become far more equal. But, while the gap between countries is now much smaller, in recent decades, inequality within some advanced countries, especially in the United States, has risen.
Rather than income or consumption, in this post we focus on the distribution of wealth. Wealth affects welfare in at least two key ways. First, in the presence of borrowing constraints, it provides a buffer against fluctuations of income, allowing households to smooth consumption in the face of temporary bouts of illness or unemployment. Second, it provides the basis for household spending in retirement. .
As we will see, the distribution of wealth is far less equal than that of income. Moreover, recent research shows that, following the Great Financial Crisis of 2007-2009, the U.S. wealth distribution has become decidedly more unequal. As a result, a large portion of U.S. households appears to have little scope for meeting retirement needs out of their current net worth, making federal insurance programs key to their future well-being. Read More
We see health as a basic human right. Every society should provide medical care for its citizens at the level it can afford. And, while the United States has made some progress in improving access to care, the results do not justify the costs. So, while we agree with President Trump’s statement that the U.S. health care system should be cheaper, better and universal, the question is how to get there.
In this post, we start by setting the stage: where matters stand today and why they are unacceptable. This leads us to the real question: where can and should we go? As economists, we are genuinely partial to market-based solutions that allow individuals to make tradeoffs between quality and price, while competition pushes suppliers to contain costs. But, in the case of health care, we are skeptical that such a solution can be made workable. This leads us to propose a gradual lowering of the age at which people become eligible for Medicare, while promoting supplier competition.... Read More