NABE Policy Survey:
Tighten Macroeconomic Policies Later Rather than Sooner
The National Association for Business Economics (NABE) recently surveyed its members on a number of policy issues. Results of the survey show that generally, there is not much support among the economists surveyed for policy tightening over the next 12 months. A majority of respondents would prefer that both monetary and fiscal policies become more stimulative or remain unchanged in 2013. Only one-third of the respondents feel that both monetary and fiscal policies should, respectively, become more restrictive next year. However, support among the panel rises for policy tightening in the longer run, with more than one-half of the business economists surveyed indicating that they feel fiscal policy should become more restrictive in 2014.
Consistent with findings of the March 2012 NABE Economic Policy Survey, there is overwhelming support among NABE members for a balanced approach to eventual fiscal tightening. Although respondents’ views seem to tilt in the direction of favoring spending cuts, roughly 90 percent of panelists would prefer some combination of spending cuts and tax increases in order to reduce the federal government budget deficit. Only a small minority (less than 15 percent) of survey participants think that the payroll tax should be permanently extended at its current rate, but higher percentages—between 35 percent and 45 percent—favor permanent extension of current tax rates on income, dividends, and capital gains. The vast majority of panelists feels that uncertainty about fiscal policy is holding back the pace of economic recovery.
Most respondents consider current monetary policy to be “about right” and three-quarters of the respondents believe that short-term interest rates will remain unchanged over the next 12 months. Note that the survey was conducted before the Federal Reserve announced a third round of quantitative easing (QE) on September 13, and nearly 60 percent of the panelists said that the Fed should not undertake more QE. There was no clearly defined consensus among panelists about the efficacy of the Fed’s announced target for inflation and its projections of the federal funds rate.
Two-thirds of the panelists believe that a Volcker-type rule, which would prohibit banks from engaging in trading for their own accounts, should be enacted, and 70 percent of the panelists favor approval of the Keystone pipeline. There is also a widely shared expectation that health-care costs in the United States will account for a larger share of GDP in 10 years than they do at present, assuming that the Affordable Care Act is not repealed. Finally, more than 60 percent of the NABE panel expects that in five years, the European Monetary Union will have less than its current 17 member countries.
Respondents to the current survey seem to lean toward the policy option of more fiscal stimulus for 2013 but less stimulus for 2014. A plurality of respondents (43 percent) considers current fiscal policy to be too “restrictive,” and a similar share (45 percent) favors more fiscal stimulus for 2013 (Figure 1). About one-third of the economists surveyed prefers that fiscal policy be “more restrictive” in 2013. In contrast, a slight majority of respondents (54 percent) prefers a more restrictive fiscal policy for 2014, versus only one-quarter who favor a more stimulative policy in that year. The continued sluggish nature of the economic expansion may be the reason why some economists prefer that fiscal restraint occur later rather than sooner.
Figure 1: Do You Prefer Fiscal Policy to Be:
Note: In this and all figures, percentages may not sum to 100% due to rounding.
Consistent with their support for more stimulus in 2013 and less stimulus in 2014, a majority of respondents favors extending the payroll tax cuts, current marginal income tax rates, and current tax rates for dividends and capital gains for most or all taxpayers through 2013. In addition, three-quarters of the panelists feel that sequestration should not go into effect starting in 2013. However, there is less agreement among panelists regarding the permanent extension of tax cuts. Although three-quarters of those surveyed think that the payroll tax cut should not be permanently extended, the percentages of respondents favoring permanent extension of the current tax rates on income, dividends and capital gains are roughly similar to the percentages that think these tax rates should not be permanently extended. That is, 30 to 40 percent of the respondents feel that the tax rates should be permanently extended, while similar percentages are not in favor of a permanent extension. A much smaller percentage of survey participants favors keeping the reduced tax rates only for households earning less than $250,000 per year.
The vast majority of survey respondents favors some combination of higher taxes and reduced spending to reduce the federal budget deficit. This result is consistent with the views reported in the March 2012 survey. The panel still tilts more in the direction of favoring spending cuts, but not as strongly as it did in the March survey. Over 40 percent of respondents think Congress should reduce the deficit only or mostly through spending cuts while about 15 percent think Congress should reduce the deficit only or mostly through tax increases (Figure 2). (In March, 50 percent of respondents favored spending cuts versus 11 percent who favored tax increases.) A plurality of NABE panelists—45 percent—favors equal parts of spending cuts and tax increases, up from the 39 percent who held this view in March.
Figure 2: How Should Congress Reduce the Federal Budget Deficit?
A clear majority of respondents favors tax reform that boosts tax revenue rather than reduces revenue or is revenueneutral, but most favor only a “slight” increase in revenue rather than a “significant” increase. When asked “on what areas should tax reform efforts for individuals focus,” the option of broadening the tax base via subsidy/loophole reduction or removal received the most support from the NABE panel. Changing the income-based tax system to a consumption-based system was a distant second, with reducing marginal tax rates third.
Finally, perhaps the most telling result from the survey is that an overwhelming majority of panelists (87 percent) believes that uncertainty about fiscal policy is holding back the economic recovery.
Consistent with the results of the last two NABE Economic Policy Surveys (August 2011 and March 2012), a slight majority of the respondents (59 percent) indicates that current U.S. monetary policy was “about right” (Figure 3). The percentage of respondents replying that monetary policy was “too stimulative” fell slightly compared to the percentage that held that same view in March of 2012, while the proportion answering that policy was “too restrictive” edged up. Perhaps the declines in the overall and core rates of CPI inflation and/or the apparent moderation in the pace of U.S. economic growth have caused some panelists to believe that more policy accommodation may be appropriate now than six months ago.
Figure 3: Do You Consider Current Monetary Policy To Be:
Three-quarters of the NABE panel project that U.S. short-term interest rates will remain “about where they are today” over the next 12 months. Of the remaining 23 percent of the panel that forecast an increase in short-term rates, the vast majority (roughly 85 percent of this sub-group) thinks that short-term rates will rise by 50 basis points (bps) or less. Only 3 percent of the entire panel looks for short-term rates to increase by more than 50 bps over the next 12 months.
The survey found only lukewarm support for some of the Federal Reserve’s non-conventional policies. Although a slim majority of the panelists (53 percent) feels that the quantitative easing (QE) that has been undertaken already by the Fed “has been a success,” only one-quarter of the respondents thinks that the Fed should pursue another round of QE. (The survey was conducted before the FOMC announced its third round of QE on September 13.) Nearly 60 percent of survey respondents indicate that the FOMC should not sanction further QE, while 16 percent have no opinion.
These results were consistent with answers to a question about policy preferences. Only one-quarter of the panelists would prefer monetary policy to be “more stimulative” over the next 12 months. About half of the respondents would prefer unchanged policy over the next 12 months while one-quarter would prefer more restrictive policy over that period.
Turning to another non-conventional policy of the Federal Reserve—the Maturity Extension Program (i.e., so-called “Operation Twist”)—only 39 percent of the panelists think that the policy has been successful. The FOMC has announced that the program will be completed by the end of 2012, and only 22 percent of the panelists believe that “Operation Twist” should be extended further at that time.
Despite the unprecedented policy accommodation that the Federal Reserve has provided over the past few years, the panelists generally remain sanguine about prospects for future inflation. Although one-third of the panelists thinks that inflation will be “significantly above” the FOMC’s 2 percent inflation target in five years, more than 60 percent feel that inflation will be “near” the 2 percent target. Only 4 percent project that inflation will be “significantly below” target in five years.
The Federal Reserve has also adopted a more open communications strategy over the past few years, arguing that more transparency increases the effectiveness of monetary policy. However, there was no clearly defined consensus among the NABE panelists about the efficacy of this strategy. Although a slim majority (54 percent) thinks that the FOMC’s announced long-run inflation target of 2 percent increased the effectiveness of monetary policy, only 41 percent think that the projections of the fed funds target that the FOMC provides on a quarterly basis increased the effectiveness of policy (Figure 4). Twenty-eight percent of the panelists do not think that the FOMC should provide any guidance on the federal funds rate because they do not believe it increases the effectiveness of monetary policy. Nearly one-third of the panel is “not sure” about the efficacy of the fed funds projections, significantly more than the proportion expressing no opinion about the effectiveness of the inflation target.
Figure 4: Do These Communication Strategies Improve the Effectiveness of Monetary Policy?
Regulatory Policy Questions
The survey asked NABE panelists for their views on several regulatory issues affecting various sectors. Regarding the financial sector, two-thirds of the panelists believe that a Volcker-type rule, which would prohibit banks from engaging in trading for their own accounts, should be enacted. However, there is less agreement on their general views toward big banks. Although slightly more than half think that banks that are “too big to fail” should be broken up, one-third would oppose such a move.
With respect to energy policy, 70 percent of the panelists favor approval of the Keystone pipeline which would transport oil from Canada to refineries in the United States. A smaller majority (55 percent) believes that national regulations over hydraulic fracturing (“fracking”) should be enacted. The NABE panel is essentially evenly split over the wisdom of subsidizing alternative energy sources (wind, solar, geo-thermal, etc.). A slightly larger proportion (50 percent) opposes such subsidies rather than supports them (46 percent).
The economists responding to the survey are also divided in their views over the merits of health care reform. Although a slim majority believes that Congress should not repeal the Affordable Care Act, 40 percent of those polled believe that the law should be repealed. However, one of the questions revealing the highest agreement among economists regards the cost of health care. About three-quarters of the panel think that health care costs will continue to grow as a share of GDP over the coming decade if the Affordable Care Act is not repealed. Panelists are also in general agreement over the likely reaction of employers to the legislation, with nearly 60 percent believing that fewer employers will provide health care coverage for their employees over the next ten years.
European Monetary Union
Uncertainty regarding the future of the Eurozone remains high. A plurality (46 percent) of the panelists believes that all 17 current members will still be in the Eurozone a year from now (Figure 5). However, the proportion plummets to only 14 percent if the time horizon is extended to 5 years. Indeed, more that 60 percent of the survey respondents believe that the European Monetary Union will not contain all 17 current members in five years.
Figure 5: Will All 17 Members Remain in the Eurozone?
Embargoed until: Monday, September 24, 2012, 12:01 AM ET
The NABE September 2012 Economic Policy Survey presents the consensus of a panel of 236 members of the National Association for Business Economics. The NABE Economic Policy Survey is conducted semiannually; the most recent survey was taken between August 2, 2012, and August 24, 2012. Portions of this survey may be reprinted in whole or in part with credit given to NABE. View the survey results, including complete tabulations, online at www.nabe.com. This is one of three surveys conducted by NABE. The other two are the NABE Outlook Survey and the NABE Industry Survey. Jay Bryson (Wells Fargo Securities), Chair; Paul Hughes-Cromwick (Altarum Institute); Constance Hunter (NABE Director); Robert Fry (DuPont); Saswati Mahapatra (Cognizant Technologies); Lynn Reaser (Point Loma Nazarene University); and Robert Yerex (Civitas Learning) conducted the analysis for this report.
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Melissa Golding -