By Brai Odion-Esene
BOSTON (MNI) – Rather than engage in a carpet bombing campaign to
address the nation’s jobs crisis, the Federal Reserve can anticipate the
likely impact of entrenched fiscal policies such as unemployment
benefits, and tailor its actions to ensure efforts to boost employment
via monetary policy is not negated, Harvard Economist Martin Feldstein
said Wednesday.
In remarks during a panel discussion on fiscal policy as a
stabilization tool at the Boston Fed’s economic conference, Feldstein
said to the extent that the Fed cares about employment — either because
of its dual mandate or what Fed Chairman Ben Bernanke Tuesday described
as “a flexible inflation target” — the central bank could also
anticipate the future path of certain aspects of fiscal policy.
“A key characteristic of automatic stabilizers is that to the
extent that the central bank makes forecasts of what’s going to happen
to the economy, it can forecast what’s going to happen to that component
of fiscal policy,” he said. “It can forecast the extent to which
stabilization is happening.”
“And therefore, presumably, the central bank can do less,”
Feldstein added.
A large part of the automatic stabilizers in the government
spending side are measures like unemployment benefits.
The question, the economist continued, is do automatic stabilizers
really add anything if monetary policy is effective, and does the
central bank anticipate the likely impact of automatic stabilizers and
then offset them.
“Since automatic stabilizers are by definition predictable
stabilizers, monetary policy just isn’t responding,” Feldstein said,
reiterating his argument that the Fed has a view about what the economy
is going to do and therefore what automatic stabilizers will play a
contributing role.
“They would take that into account and therefore the net, net
effect of it all would be much less,” he added.
On the subject of discretionary fiscal policy, Feldstein said
raising marginal tax rates as a way of increasing revenue has a negative
effect compared to broadening the tax base without changing marginal tax
rates.
And as for government spending side, Feldstein said there are very
big differences in the potential stabilizing effect of different kinds
of public expenditure.
“Transfers are very different from direct outlays,” he said, adding
that defense outlays are one area where even those skeptical about the
efficacy of fiscal policy have found clear evidence that changes in
defense outlays have “significant effects, significant multipliers.”
** Market News International **
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