Robert Triest is a vice president and economist in the research department of the Federal Reserve Bank of Boston.
Harlan Levy: What’s the outlook for jobs
R.T.: Over the next three years, the unemployment rate will be gradually falling, and inflation will be very subdued in the immediate future, then gradually increase to a longer-term range that’s consistent with the price consistency the Fed is mandated to maintain of roughly 1.5 to 2 percent.
H.L.: Analyze the December economic data a bit, please.
R.T.: The latest job data was a mixed bag. The growth in payroll employment was only 103,000 in December, so that’s a disappointment. It was below what most economists were expecting. On the other hand, the unemployment rate fell from 9.8 percent to 9.4 percent, so that was actually better than expected, although that tends to be a little more volatile when the growth in payroll employment is an indicator of overall strength and activity.
So I’d expect that per year over the next three years or so the unemployment rate each year will be dropping somewhere on the order of about eight tenths of a percentage points per year.
H.L.: What do you think of the economy?
R.T.: The economy is improving. We had some positive news in December both in terms of some of the new economic data that came in, but also what happened in the policy environment The extension of the tax cuts and some of the other elements in the fiscal bill was positive news.
The Federal Reserve has undertaken a large-scale asset purchase program for longer-term Treasurys that will help to maintain really low longer-term interest rates. So there’s a lot of policy support for additional growth in the economy.
H.L.: The Fed says it will spend $600 billion to buy longer-term Treasurys in the first half of this year, supposedly to fund programs and recipients to help the nation’s economy. But after June 30, when the money stops, won’t the floor collapse a bit?
R.T.: The hope and the expectation is that this is jump-starting the economy, and so government stimulus, whether it’s fiscal stimulus (from government, including Congress)or the stimulus brought about by monetary (Federal Reserve) policy , you have to jump-start the econcomy to the point where the recovery is sustained on its own power.
So as we have a pick-up in growth in investment and consumer spending, that will be really self-perpetuating itself and be able to keep the economy growing beyond the period of the stimulus provided by the large-scale asset purchases.
Of course we’ll be meeting multiple times during that period and could be adjusting the policy stance depending on incoming data.
H.L.: Republicans in Congress are determined to cut spending drastically but not cut Medicare, Social Security, or defense or raise any taxes. Some economists see that as nothing but bad. What do you think?
R.T.: What you’re talking about is the longer-term fiscal picture, which is fairly dire. We have long-term structural deficits that need to be addressed.
I tend to be an optimist. There is a bipartisan commission appointed by President Obama that reported in December, and I’m optimistic that members of both parties will come along to support some elements of that.
H.L.: But how can you not raise taxes and not cut spending in Medicare, Social Security, and defense and then do dramatic spending cuts somewhere, but I don’t know where. Do you?
R.T.: There is an arithmetic problem that it’s really hard to cut discretionary spending by enough to solve the long-term deficit problem, so something else is needed.
In the short-term, deficit spending is a necessary component to help to sustain the recovery until it’s self=perpetuating. In the longer term, the structural deficits do have to be addressed. There are basic arithmetic constraints in terms of where you can get enough money to make the fiscal situation sustainable in the long term.
Again, when you listen to political proposals, it’s hard to read much into that until the different parties come to the bargaining table and decide on some package that can get through Congress. You have to remember that when political positions are being staked out what happens is that there will be some compromise that will have to be reached in order to come up with a workable plan. I remain an optimist that despite some of the rhetoric, when it really comes down to crunch time, the parties will come together and strike a compromise that will put us on the right path.
H.L.: Won’t Congress have to raise taxes, no matter what anybody says to convince us to the contrary?
R.T.: It’s a matter of where do you come up with the money to put the nation on a sustainable fiscal path. It’s very difficult without either tax increases or cuts in the major expenditure programs. That’s as far as I’ll go.
H.L.: What is the situation with Social Security, Medicare, and defense?
R.T.: Social Security has a long-term fiscal imbalance, but it’s actually relatively manageable. It could be addressed even just within the confines of the Social Security program per se: raising the normal retirement age, increasing the payroll tax rate moderately, extending the base over which earnings are taxed under the Social Security payroll tax.
Medicare and Medicaid is a much tougher problem to solve. A lot of that is due to underlying trends in medical costs that are driven largely by improvements in medical technology. But even that problem is in the sense of we expect further advances in medical technology. Those things will be expensive, but they may well have wonderful prospects for things like health and longevity. So we have to pay for that, but it’s not in itself bad news.
If we just froze technology where it is now, there’d be upward pressure on medical costs for the aging population, but that’s relatively moderate compared to what’s generated by technology changes.