NABE Policy Survey, March 2001

NABE Policy Panel Says the Fed Has Been Too Tight, Recommends and Expects Further Monetary Stimulus, Supports Across the Board Income Tax Reductions as the Best Policy Option

COMMENTS - Goodbye Goldilocks. For the first time in nearly five years, the NABE Policy Survey panel has major reservations about the temperature of the Fed's monetary policy porridge. In twelve of the last thirteen surveys, Federal Reserve policy has been regarded as "about right" by between 74 percent and 86 percent of NABE Policy Survey panelists, and the fraction considering the Fed too tight has never been above 16 percent during this period. The latest NABE Policy Survey, in contrast, finds only 56 percent of those polled agreeing with the Fed's posture, and a full 34 percent -- the highest fraction since February, 1996's 48 percent reading -- believing that monetary policy is too restrictive. Consistent with the results of the recently released NABE Outlook (a survey of a smaller panel of economic forecasters), which identified rising recession risks, 85 percent of Policy Survey panelists believe further monetary easing is on the way. The central tendency of their expectations is a further decline between 50 and 75 basis points, less than the easing expected in the Fed funds futures markets in mid-March. "NABE panelists agree with Federal Reserve and private forecasts suggesting that a moderate recovery is will emerge in the second half of this year," said Richard Berner, NABE President and Chief U.S. Economist at Morgan Stanley Dean Witter. Since the Survey was taken, the Fed's Open Market Committee moved on March 20 to lower the Fed funds target by another 50 basis points.

Survey Highlights

• Monetary Policy and the Fed - With the overcooling of the economy, NABE Policy Survey panelists have radically modified their opinions about monetary policy over the last six months. One-third believes the Fed is too restrictive, up from 9 percent in August 2000. Sixty-six percent believe the Fed should ease further (as compared with 11 percent six months ago), and a full 85 percent expect the central bank to lower rates over the next six months (versus just 4 percent in August of last year).
  
• Threats to the Expansion - Financial distress continues to register prominently on the worry list for three out of ten panelists. Concerns over consumer and business indebtedness rose from 9 percent to 15 percent, and fears of the fallout of a stock market bubble registered 14 percent, down slightly from 22 percent last August, probably reflecting the market correction. Electricity/natural gas supply and energy costs concerned 12 percent of respondents. Labor market supply and quality issues, the most important worries (27 percent of those surveyed) last August, fell to tenth place and were a problem for only 5 percent of respondents.
• Debt Paydown and Tax Policy - While 70 percent of Survey panelists favored paying off the Federal debt, only 17 percent thought it had top priority, while 53 percent liked a gradual approach. This gradualist bias may suggest that our panelists agree with Fed Chairman Alan Greenspan's testimony on the appropriateness of tax reductions. On the assumption that a tax cut is a certainty, we asked our panelists to rate a number of alternatives. Ninety-one percent endorsed simplifying the tax code, and 85 percent supported raising 40l(k) ceilings. Seventy percent felt that lowering all marginal tax rates was a good idea, while 29 percent considered lowering only low and middle income tax rates to be sound policy. Seventy-five percent supported repealing the marriage penalty, but the panelists were divided (40 percent for, 43 percent against) on the wisdom of repealing the estate tax.
• Spending Priorities - Quality Federal statistics were the expenditure of choice for our panelists, as 70 percent of respondents felt increased outlays in this area were a good idea. Infrastructure improvements received a 65 percent favorable rating, more education outlays 62 percent, increased military preparedness 56 percent, and a low income health subsidy 53 percent. Neither a prescription drug benefit nor an increase in outlays on the judicial system or law enforcement commanded majority approval.
• Social Security - Despite hefty Federal surpluses, nearly all of the NABE Policy Survey panel - 91 percent - felt that Social Security needs to be reformed; only 9 percent advocated keeping the system as is. One-third (33 percent) favor a "tweaking it" solution, while partial privatization (e.g., 2 percent of contributions invested into IRAs) garnered an equal 33 percent level of support. Sixteen percent support totally privatizing the system.
• Electricity Deregulation - Despite the recent problems in California, 55 percent of NABE Policy Survey panelists believe that deregulation offers great benefits, and the Golden State's mistakes can be avoided; another 8 percent consider California's problems an aberration, and say every state should deregulate, and the sooner the better. One-third of our panelists are more cautious: 21 percent say deregulation can improve electricity supply, but is very difficult to do properly; another 9 percent say that even if deregulation can work it is unnecessary because regulation works well enough; and 4 percent say flatly that deregulation doesn't work.
• Administration's Dollar Policy - NABE Policy Survey panelists believe (by 60 percent to 38 percent) that the White House should have a policy on the dollar. By a margin of four-to-one, however, those favoring an explicit policy said that policy should be that the dollar is determined by market forces, rather than being clearly for a "strong" or "weak" dollar.
  

Survey Details

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David McClain, University of Hawaii, College of Business Administration, NABE Policy Survey Writer

 

The NABE Economic Policy Survey presents the consensus of a panel of 267 members of the National Association for Business Economics. Conducted semi-annually, this survey was taken during the last week of February and the first week of March 2001. May be reprinted in whole or in part with credit given to NABE. This is one of three surveys conducted by NABE. The other two are the NABE Outlook and the NABE Industry Survey.

 

Survey Details

Survey PDF (89K)