Panelists debate duration of U.S. downturn and appropriate mix of monetary and fiscal policies

• Author: Paula De Masi
• Position: IMF Western Hemisphere Department
• Pages: 61-63

Page 61

Amid increasing concerns about the health of the U.S. economy-including talk of recession-the Economic Strategy Institute convened a panel of private sector experts in Washington, D.C., on January 30 to discuss the economic outlook and debate the appropriate course for monetary and fiscal policy.

There was agreement on why U.S. growth had weakened but a broad range of views on the potential severity and duration of the downturn. And while the panelists broadly agreed that a tax cut, in addition to a continued easing of monetary policy, could provide further stimulus to the economy, the size, timing, and impact of that tax cut stirred considerable debate.

Soft landing?

William Dudley,Managing Director and Chief U.S. Economist for Goldman Sachs, predicted that though the risk of recession had increased, an aggressive easing of monetary policy would successfully, albeit narrowly, avert it. A number of factors were contributing to the downturn in U.S. economic activity, he said.

The growth of consumption spending had slowed considerably from its rapid pace over the past few years-largely the result of higher energy prices and the recent decline in stock market wealth. Investment spending had also decelerated sharply, reflecting the higher cost of capital and tighter lending conditions.

In the near term,Dudley expected the U.S. Federal Reserve to continue to stimulate demand through further easing of monetary policy.He expected that by mid-2001, the Federal Reserve would have lowered the federal funds rate to about 4!/2 percent to prevent the economy from slipping into recession. Tax cuts could potentially provide some stimulus to the economy, but Dudley was not optimistic that the composition and size of the tax package could be agreed upon quickly.

The legislative process could easily delay implementation of these cuts until late in 2001 at best, and tax cuts at that stage, he said, would not have much impact on economic growth for the year.

Right policy mix?

While also projecting a soft landing for the United States, Robert Litan, Director of Economic Studies at The Brookings Institution, underscored the trickiness of getting monetary and fiscal policy right under current economic conditions.He cited, in particular, questions about the timing and nature of the tax cut proposed by the new Bush administration.He believed the Bush...