Panel on Monetary-Fiscal Issues

Monday, October 14, 2024
Hoover Institution | Stanford University

Panel on Monetary and Fiscal Issues. This panel was moderated by Michael Boskin of Stanford and the Hoover Institution and featured presentations by John Cochrane of the Hoover Institution, Charles Plosser, former President of the Federal Reserve Bank of Philadelphia and SOMC member, Deborah Lucas of MIT and the SOMC and Patrick Kehoe of Stanford University. Boskin set the backdrop for the session, describing how the Federal government debt had risen dramatically, primarily due to the rapid growth of spending on entitlement programs, while funds for defense and national security had been insufficient. He noted that neither presidential candidate recommended any programmatic spending cuts that would even slow the rise in the debt. Kehoe described how historically the government’s finances had improved during peacetime periods, with lower debt-to-GDP ratios, which better prepared it to finance war efforts.

However, the recent runup in government debt has been irresponsible and places the government in a poor position to face the next crisis. Lucas emphasized that the government’s budget was based on cash flows and did not adequately capture the costs of many government credit programs and other subsidies including forbearing debt repayments. She urged an upgrading of accounting in Federal budgeting. Plosser emphasized that the Fed’s enlarged balance sheet that had resulted from its large-scale purchases of Treasuries and mortgage-backed (MBS) securities and the Fed’s credit provisions have crossed the boundary between monetary and fiscal policy. He worries that this expanded scope of the Fed exposes it to political pressures and would ultimately jeopardize its independence. Cochrane emphasized how the recent bout of inflation was a perfect example supporting his fiscal theory of the price level that posits the dominant role of fiscal deficits as the source of inflation. He then provided different scenarios of Fed adjustments of interest rates to fiscal shocks and concluded that one solution that would reduce the risks of higher government debt and inflation was stronger real economic growth.