Credit Crunch, Health Policies Top Policy Conference Agenda

Against the backdrop of a sluggish economy hobbled by the mortgage credit crunch, top policymakers and private analysts told attendees of NABE’s 23rd annual Washington Policy Conference that they see significant shifts along political lines that could mean breakthroughs soon on several sticky policy issues. Many speakers expressed concern about growing credit problems in the housing market, while others focused on health policy reforms and likely outcomes.

Inflation prospects and how they might affect monetary and fiscal policy also emerged as major themes over the two days of general and concurrent sessions, March 12-13, at the Marriott Crystal City.  The official conference theme of  “An Economic Framework for Effective Policymaking” pulled together a wealth of perspectives from speakers both inside and outside the federal government as they offered policy prescriptions and their best prognostications for how Congress and the Bush White House will approach key issues in coming months.  

Will the mortgage credit crunch spill over into the broader housing market?  Will the Federal Reserve have to lower interest rates to keep the economy afloat? Have prospects for significant health care and tax reform improved since the Democrats took over the Congress?  These are a few of the key questions addressed by keynote speakers and others at the conference.

Coverage of the Policy Conference in this issue includes the following separate reports:
“U.S. Policy and the Changing Global Landscape” by Charles Steindel, “Sarbanes-Oxley: Does the Fix Need Fixing?”  by Richard DeKase, “Different Views of Reforming Medicaid” by Devon Herrick,  and  “Will Adjustable Rate Mortgages Sink Housing Market?” by Jack Kleinhenz. 

NABE President Carl Tannenbaum, LaSalle Bank/ABN AMRO, thanked the conference’s program committee: John Silvia, Wachovia Bank, chair; Kathleen Camilli, Camilli Economics; Charles Steindel, Federal Reserve Bank of New York; and Richard Wobbekind, University of Colorado. 

Attendees told NABE that they appreciated the breadth of issues covered over the two days and the quality of speakers, as well as networking opportunities.  Even if topics covered were not directly in their areas of work, many participants said they valued the “well-rounded” scope of the presentations.  More than 300 people attended the conference.

Released the first day of the Policy Conference, NABE’s semiannual economic policy survey showed that terrorism continued to top the list of short-term problems facing the U.S. economy, while health care costs and the growth of the elderly population ranked as the top two long-term challenges.   “NABE members are fairly sanguine about the U.S. economy, and a growing number think that fiscal and monetary policy are about right,” said Tannenbaum. “But concerns about household and/or corporate debt are creeping in and housing markets remain a point of vulnerability.” 

Kroszner Looks at Dynamics of Inflation

In his March 12 luncheon speech, Federal Reserve Board Governor Randall S. Kroszner explored the major reasons behind current inflation dynamics and traced the history of inflation expectations from the double-digit period of the late 1970s.  He underscored the important role that the central bank plays in influencing the formation of inflation expectations and, thereby, in affecting how businesses and consumers react to temporary price hikes.  Much progress has been made toward a more stable inflation environment, he said, citing recent price data.

“When inflation moves above its recent long-run average, most of the upswing will likely be reversed, although this result is not guaranteed.  That’s a remarkable change in the behavior of inflation,” Kroszner told the conference.  In the late 1970s and early 1980s, when inflation rose at a rapid pace, these sharp increases were reversed much more slowly, he noted.  Even during recent periods of sharply rising energy prices, there is scant evidence of a major pass-through of higher energy costs to other goods and services, he pointed out.

“This experience of low and stable inflation, coupled with the Fed’s clear statements of commitment to maintaining this performance, has no doubt contributed to the stability of long-run inflation expectations in the past decade or so,” Kroszner said.  He cited the results of the Philadelphia Fed’s Survey of Professional Forecasters, in which “long-run inflation expectations have barely budged since 1998.”  

Looking ahead, Fed policymakers must continue to analyze a wide array of data, Kroszner said.  The relative stability of inflation must not prompt the Fed to become complacent, he said, as such “complacency would be a threat to the credibility that the Federal Reserve has worked so hard to acquire, and its loss would likely mean the reversal of many of the favorable inflation developments seen over the past two decades.”

Private analysts speaking later on March 12 at a concurrent session on alternative monetary policy said they are closely watching whether the Fed will lower interest rates if the economy remains sluggish and the housing slump persists. It could be a tough call if core inflation remains higher than Fed officials would like, they said.  Ethan Harris, chief economist of Lehman Brothers, said he expects the Fed “will be on hold as long as core inflation is still high.”  Also, with what he called “a modestly tight labor market,” Harris said the Fed has less room to ease unless economic growth slows and unemployment starts to rise.  Robert T. McGee, chief economist of the United States Trust Company, said that business spending has moderated more than most forecasters expected, “making most companies more reluctant to hire.”  He is looking for signs of below trend growth that could result in deflation, led by the housing slump.

Handling of Mortgage Credit Key to Forecast

A great deal is riding on how the federal government and, to some extent state agencies, address the evolving mortgage credit crunch, said Lawrence Lindsey, president and chief executive officer of the Lindsey Group and a top official in the first term of President Bush.  He served as director of the National Economic Council (2001-2002) and assistant to the president on economic policy. From November 1991 to February 1997, Lindsey served as a Federal Reserve Board governor and in that capacity was chairman of the board of the Neighborhood Reinvestment Corporation, a national public/private community redevelopment organization.

Lindsey urged keeping a close watch on the spring home-buying season and how the credit problems of the subprime market might spill over into the broader market.  “I have a bad feeling that if we don’t have a good season, we will see another price decline” across the market. 

It will be tempting for regulators to overreact in making credit more restrictive, Lindsey said.  Remembering his tenure at the Federal Reserve in the 1990s, he said that during that time it was common for a homebuyer to put down 20 percent of the purchase price to obtain a mortgage loan.  By 1995, the down payment was often 10 percent or less and about 40 percent of buyers in put no money down in recent years.  “And I thought credit was loose then,” he said.

Health Care Options Gaining Momentum

As one of the Bush administration’s lead officials on health care reform, Council of Economic Advisers Member Katherine Baicker told Policy Conference participants that she was encouraged about recent interest in the White House proposals sent to Congress as part of the fiscal 2008 budget package.   Administration officials, including Health and Human Services Secretary Mike Leavitt, have met with several governors about proposals that fall under the “affordable choices initiative” that targets low-income and chronically ill persons, she said.

While the U.S. system offers “premier health care,” this country spends nearly twice as much per capita as many developed countries without that necessarily translating into better outcomes, Baicker said.  Private health insurance premiums have been rising at more than three times the rate of inflation and “the tax treatment of health insurance is very expensive,” she said.

The crux of the proposed White House plan for changing what it calls a “biased” tax treatment that has created “an unbalanced playing field” would give taxpayers a standard deduction for health insurance to offset a new requirement to report a portion of the value of employer-provided health coverage as income.  Employers would continue to deduct the cost of health care from their taxable income.  Eventually, Baicker argued, once the tax code no longer favors health benefits over wages, employers would be able to pay higher wages.

SEC Commissioner Sees Need for More Cost-Benefit Analysis

Securities and Exchange Commissioner Paul Atkins focused his remarks at the March 13 luncheon on new standards for subjecting proposed regulations to cost-benefit analysis.   Under the leadership of SEC Chairman Christopher Cox, Atkins said the agency wants to make sure it “considers the ramifications of specific regulatory actions” by conducting economic analyses before proposing new rules or changes to current regulations.

In a recent example, Atkins said the SEC published two studies by the agency’s Office of Economic Analysis related to investment company governance. These studies were published after a lengthy court battle over implementation of what was regarded by businesses as a burdensome rule that would have required mutual fund boards to have at least 75 percent independent directors.  Atkins called release of the studies “a watershed event in the life of a rule that has been marked by a dismissal of economic consequences.”
 
“Economists can also help lawyers at the SEC to understand the complexity of the cost-benefit analyses engaged in by those who are subjects of Commission enforcement actions,” Atkins said.  “Looking at corporate penalties through an economic lens leads one to ask whether it is appropriate for the shareholders of a corporation, who were often the ones victimized by a financial fraud, to pay a penalty,” he said.

Climate Changes of a Political Nature

House Budget Committee Chairman John Spratt (D-S.C.) outlined the Democratic viewpoint on key fiscal issues facing the Congress in negotiating with the Bush administration. Democrats plan to address the alternative minimum tax, Spratt said, as it continues to affect more middle-income taxpayers in part because it is not indexed for inflation. Balancing the budget should come first, followed by Social Security reform, he said, adding that none of the needed policy reforms changes will be easy.

Assessing the changing political climate, Thomas Gallagher of ISI Group and Gregory Valliere of the Stanford Research Group—suggested that shifting political alliances could break logjams on thorny issues such as immigration, health care, and tax reform.  But will there be time for action before the 2008 president election campaign heats up?

Expecting Congressional action on what he called “second-tier” issues such as the federal minimum wage and alternative fuels, Gallagher predicted that 2007 would see some progress on major issues.  However, if action isn’t taken this year on the sticky issues of immigration and tax relief from the alternative minimum tax, the chance of reaching a compromise declines as the 2008 election approaches. In 2008, the economy will experience “electoral uncertainty,” he said, recalling that in 2004 the pre-election period saw a slowdown in financial markets. “The 2008 election is a more consequential election,” he said, as the White House could switch to the Democratic side. And, once the nation elects a new president and Congress, “it will be much harder to keep tax rates down” as the lack of spending restraint will demand higher revenues, he said.

Valliere offered a list of reasons that “the stars are in alignment for the Democrats to win the White House.”   There are few instances where the party of an incumbent president whose approval ratings are below 30 percent wins the White House, he said, adding that the shift of Hispanic voters away from the GOP to the Democratic party is also a factor. Both Valliere and Gallagher, as well as other speakers, said they sense more willingness by Congress to consider health care reform this term than in the previous Congress.

See the Policy Conference Session Pages for speaker presentations, papers, biographies, and links to websites of interest for topics covered in each of the sessions.